What could hamper Euro ahead of ECB meeting, BoC edgy and crude continues stress on CAD?

ECB President Draghi faces a tough task curbing the appeal of the single currency. CAD short positioning is showing signs of exhaustion.

The euro jump in recent trend is major due to the massive price drops in crude prices to $28 way below the ECB projections for 2016 ($52.2) and the causing drop in inflation prospects present a stern encounter to the distributed governing council, this Thursday's interest decision must deliberate whether it is equipped for a signal further policy action or carry on as is in order to bring back inflation expectations crumbling.

On the other hand, we've seen a lacklustre beginning to 2016 for global financial markets so far which has been supplemented by a sharp surge in the move to flight-to-quality assets, from equities/oil and EM into government bonds and refuge currencies.

Backed by a large current account surplus, speculative investors have added to their long JPY positions and cut their short EUR base at the fastest rate in three months.

Today's pessimism in EM and scepticism over the outlook for US interest rates (narrowing rate differentials) mean a reversal of the EUR gains are highly uncertain even if President Draghi reaffirms a dovish bias.

Can BoC afford to refrain from decreasing interest rates at Wednesday's meeting?

With an approximate 60% probability, 25 bps cut is not completely factored in, so shifts in Canada/US rate differentials could be key to USD/CAD testing 1.50 or retracing below 1.40 and and EUR/CAD to 1.5425 levels.

Crude continued bearish story: WTI speculative placements have stimulated in lockstep with the price of spot prices for the past year. Long positions have essentially carved up for 50% since May 2015 from 350,000 contracts to 178,240 last week.

The ongoing bearish trend may sense one round of declining moves prior to the lifting of trade sanctions on Iran as it is likely to contribute prevailing supply glut crisis.

This is still some way off the lows of June 2012 and September 2011. We still carry our reasonably bearish stance on crude prices as total US crude oil inventories remain far above five-year highs.

However, Shorts positions in CAD softened around the 60k mark at the end of December, and the short base faded in early January to -59.2k. Provided oil finds a bottom sooner, the stimulus for the upcoming direction may shift back to rate differentials.