By Giles Coghlan, Chief Currency Analyst at HYCM
Look to pair the strong currency against the weak one
The pairing a weak against a strong currency is what I consider to be the number one thing to grasp in FX trading. Today's post is a reminder of this key concept.
The weak: CAD
The oil market has been cornered by an unusual combination of falling demand due to COVID19 and rising supply (due in part to Saudi and Russia falling out). Furthermore, the storage facilities are fast reducing and longer term storage for oil is becoming more expensive as the demand for that storage grows. Even when countries start to lift COVID19 restrictions the demand for oil will not immediately kick in due to the large build up in reserves. I am expecting CAD weakness over the next month.
The strong: USD
The USD on the other hand has been acting like a safe haven currency. Alongside the CHF and the JPY, when stocks have been falling, USD has been rising. Now, the unlimited QE by the FED should keep a lid on parabolic USD strength for now, but the USD will be bought again if we see another down leg in stocks. My view is that there is more downside to come as COVID19 implications become clear which would prompt USD buying.
Therefore, expect USDCAD buyers.
Time frame
I expect this to play out over the course of the next 2-4 weeks.
The entry
What will change this outlook?
No-one knows the future, so what will change the outlook? Any return to major strength, say $25+ on US oil will invalidate this outlook. Also, any strong return to 'risk on' will cause USD to weaken.
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