The Canadian dollar sank for the third consecutive session on Tuesday, despite a lower U.S. dollar index and a higher price for crude oil, reaching its lowest level in eight sessions. The spot loonie closed at $.79624 CAD/USD, forming a bearish gap lower this session.
This follows a near 11% move higher from the May 5 low to the July 28 high, after reaching the highest level reached since June 2015, or more than two years. Market watchers are pointing to spreads in Canada's two-year yield as compared to the same yield in the United States. This spread hit its narrowest seen since May 2015 in the last week of July at minus 2.4 basis points, which is tied to the Bank of Canada's July rate hike. This spread has since weakened to minus 9.9 points, which has led to increased selling in Canada's currency.
While the daily chart shows momentum indicators moving into a downtrend after a bearish crossover while in overbought territory, the weekly chart (not shown) is showing the potential for a similar move. The lower study shows that as of July 18 CFTC data, investors had moved into a bullish net-long futures position for the first time since mid-March. This move comes just weeks after holding the largest bearish net-short position on record of 99,109 contracts as of the week of May 23. Recent history points to the tendency of this group to lean towards a net-short position. Since the beginning of 2013, investors have held a bullish net-long position in 58 of 238 weeks, or just 24.4% of the time.
A great deal will be riding on an addition rate hike this fall, with financial markets pointing to odds of this being announced at 40% in September and 70% in October. While economic data seems favorable, Canada's success at the North American Free Trade Agreement negotiating table will be watched closely in the meantime.
The daily chart shows nearby support at the 20-day moving average at $.79134 CAD/USD, while a 33% retracement would lead to a test at $.77881 CAD/USD.
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