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FxWirePro: Uphold long USD/CAD trades on Fed’s indecisiveness

The USD weakness that began during the afternoon prompted USDCAD rallies sustainably towards 1.3355 levels. 

These levels are justified as the minutes of the March FOMC meeting published yesterday illustrated how much easier the Fed would find it to react to sustained economic weakness. It can simply cut interest rates without having to fall back onto tricks or complicated interest rate tiering. 

Despite the fact that the Fed is indecisive as to whether rate cuts are actually necessary. It is ready to decide depending on the data as to whether it will lower interest rates over the course of the year, keep them stable (as the majority of the Fed central bankers expects) or whether it will even hike them. The fact that the Fed outlook is so dependent on the data suggests that the dollar will react more notably on data surprises in the future.

USDCAD had traded firmly lower in the wake of the stronger-than-expected January GDP print from last week and has subsequently seen the largest pickup in short-end rates in G10 this week. 

Still, CAD failed to trade materially stronger with the host of risk-positive drivers that permeated throughout the week, including a +4.5% gain in oil. 

This underscores that more timely economic indicators like Canada’s Markit manufacturing PMI continue to underwhelm, and payrolls this morning contracted for the first time since August. 

The BoC’s Business Outlook Survey on April 15 will be a useful gauge. USDCAD’s better risk sentiment and continued strength in crude oil prices (WTI above $64.04/bbl, just 73 pips away from the recent highest level) are combining to pressure the USD back to the 1.3354 area. The US-Canada spread narrowing has steadied, however, which may limit the CAD’s ability to extend beyond 1.3368 for now, especially as the spot has run a little ahead of our FV estimate.

Trade tips:

Bought USDCAD at 1.3364 at the beginning of March. Marked at 0.25%. 

Bought a -3m/+7m OT USDCAD calendar call spread (k=1.40) for 16.70% in mid-January. Marked at 19.39%. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly CAD spot index is flashing at -99 (which is bearish), while hourly USD spot index was at -76 (bearish) while articulating at 11:23 GMT. 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex

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