Hard to ignore oil for Canada

Oil is on top of mind again as prices continue their straight line lower since the beginning of July. Crude has been at the core of USD/CAD's massive rally over the past 11 months and the big adjustments taking place in the economy. So, as the market searches for a bottom in oil prices it may dull the meaning of the several data releases out of Canada this week.

The other big macro focus to be aware of is how rate expectations may evolve as concerns about the impact of last week's move by the PBoC settle. Initially, the reaction saw the market push out pricing for hikes-in particular from the Fed and BoE-so if those concerns fade, pricing for hikes should come forward again in a USD and GBP positive way.The bias for those main developments continues to point higher for the two pairs that we have been strategically long on for a while now (USDCAD and GBPCAD).

"Our Technical Strategy team maintains a bearish view on crude and now looks at $39.50/bbl as the next level below (WTI on a roll adjusted basis), while our sense is that further USD/CNY appreciation will be much more gradual, and that the PBoC policy change will not be enough to influence the Fed or BoE",says RBC Capital.

Moreover, beyond the short term implications of the CNY devaluation, it is believed that, the main influence on CAD should be through the commodity price channel. That adds to strategic bearish view on CAD against non-commodity FX in particular through the end of the year.

"Trading-wise, the one thing that gives us some caution on short CAD positions at the moment is how much bearishness is already priced in. IMM short positioning in CAD is now near record levels and pricing for another BoC cut is close to ~50-60%. With that in mind, a commodity cross with similar drivers may be a better play, and we still like going long CAD vs. AUD. In AUD/CAD we look to sell rallies toward 0.9730/50", notes RBC Capital.