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Loonie, Oil Consolidate as Long Term Picture Comes Into Focus

Published November 15, 2016
  • USDCAD is consolidating above 1.3500 this morning as spot hovers just below its 9-month high reached yesterday
  • Profit taking from USD longs and a 3% pop in oil prices have helped the Loonie regain its footing this morning
  • As the dust starts to settle, the medium and long term outlooks remain supportive of a stronger greenback as the US yield curve steepens following Trump's win
  • The President-elect's fiscal stimulus plans via tax cuts and infrastructure spending are positive for US growth and will likely lead to higher imports and tighter domestic labour markets
  • As aggregate demand and wages rise, the Fed will be in a position to pursue tighter monetary policy which will support the USD and put downward pressure on the currencies of the USA's largest trading partners
  • In addition, the possibility of Trump imposing import tariffs increases the chances that trading partners will be forced to do the same
  • Trade wars, while hopefully a remote possibility and more likely to occur with Mexico and China, would likely result in a risk-off US dollar rally 
  • From a technical perspective, USDCAD has broken out of a 6-month long consolidation pattern after correcting lower from January's 1.4689 14-year high
  • The 100 day moving average has just crossed above the 200 day moving average indicating rising demand for the US dollar 
  • The last time this occurred (Q4 2014), USDCAD rallied a further 14% before consolidating
  • In Chart 2 (below) we highlight that the last two secular USD bull markets lasted at least 9 years; the current one is only 3 years old and thus may have a long way to run
  • All of this leads us to conclude that the fundamental and technical landscapes are aligned towards a stronger US dollar, and while this is by no means a certain outcome it is clearly the one with the greater probability at present

Charts: (1) USDCAD bias to the topside. (2) USD bull markets typically last 9 years. (3) Economic Calendar.