USD/CAD Outlook: Are you Loonie over FOMC?
USD/CAD has been confined to a tight range over the past months; with a ceiling around 1.33 and floor at 1.3150. Tonight’s FOMC policy statement may change this if the Fed surprise markets and cause USD volatility.
The Canadian economy has been lagging over the past four months compared to the USA; the last data for quarterly GDP growth for Canada was -0.5% compared to the US which was +3.7%. This economic difference caused CAD to weaken and USD/CAD price has moved from 1.1920 in May to 1.3350 (August high). There has also been the added factor of possible interest rate hikes in the US, which has spurred the US dollar across the board.
The Fed (Federal Reserve) will release a decision on interest rates tonight at 19:00 London time, after its open market committee (FOMC). A decision to hold rates at 0.25% is expected. If the market has factored in a nearby interest rate hike this news may weaken USD.
If you think the Fed will hold rates causing USD/CAD to fall and break-below its recent 1.3150 support, you may buy a Put option which gives you the right sell USD/CAD at a set price (strike) by a set date (expiry) for the amount you choose. The image below shows a Put to sell 100,000 USD against CAD at 1.3150 (strike) until 24th September 2015 (expiry). The options cost a 677 CAD premium to buy, which is also the maximum risk and you cannot get stopped out.
If USD/CAD falls below 1.3150 by expiry the option will payout, for example if the pair falls to 1.30 (150 pips lower) the option will payout 1500 CAD. If USD/CAD does not fall below the strike then there will be no payout and you lose the 677 USD premium paid at open.
In Canada on Friday, core yearly price inflation is expected at 2.1% versus 2.4% previous. An even lower release may cause CAD weakness. A combination of US Federal bank hints to increase rates in the near-term and low inflation from Canada may spark a USD/CAD rally to top of its range placing pressure on its 1.33/1.3350 area of resistance.
If you think the pair will rally, you may buy a Call option which gives you the right buy USD/CAD at a set price (strike) by a set date (expiry). The image below shows a Call to buy 100,000 USD against CAD at 1.3250 (strike) until 24th September 2015 (expiry). The options cost a 658 CAD premium to buy, which is also the maximum risk and you cannot get stopped out.
If USD/CAD rises above 1.3250 by expiry the option will payout, for example if the pair rises to 1.3350 (100 pips higher) the option will payout 1000 CAD. If USD/CAD does not rise above the strike then there will be no payout and you lose the 658 USD premium paid at open.
Technical Analysis (Ichimoku cloud)
Looking at the candle-bar daily chart we see a triangular pattern (black lines) which has formed over the past three weeks. This is usually a consolidation pattern and gives way to a further move in the direction of the underlying trend. However this time the formation has occurred right before a very important FOMC meeting and announcement on interest rates. This is typical before a big event when the market is unsure of an outcome and does not have a clear direction. A break on the upside of the triangle would signal a continuation of the bull trend. A break on the downside could signal simply a correction. The break on the downside is more likely to happen if US interest rates are put on hold. However, there is strong support at the Ichimoku cloud (vertical blue lined area) at 1.3001 and second support 1.2661. If the overall fundamentals of this pair remain unchanged these may be good levels to buy USD/CAD.