This Great Graphic, created on Bloomberg, shows the US dollar is threatening to move above a trendline against the Canadian dollar drop off the 2011 and 2012 highs.
The proximate cause is the dismal retail sales report., which collapsed 2.1% in December. The market had been looking for a 0.3% decline. It is the largest decline since September 2011.
In a larger sense, other factors have been weighing on the Canadian dollar. As we have been tracking in our week technical analysis and positioning piece (latest here).
Part of this may be a reflection of the unwinding of safe havens, which has also weighed on the yen, Swiss franc and sterling. Part of the Canadian dollar’s weakness also reflect a more dovish central bank as it continues to push out the eventual “removal of accommodation”.
Some may want to attribute the CAD’s weakness to oil prices, but we are less sanguine. The correlation has been trending down. On a 60-day rolling basis, looking at the percent change in oil and CAD vs USD, the correlation has been trending lower from near 0.80 to 0.20 in early February. It is below 0.3 now. Also, we note that as oil (WTI) trended higher from mid-November through late January, the Canadian dollar was not helped.
A word of caution before chasing the US dollar higher. The market is not pricing no chance of a rate hike this year. It is unlikely to switch to a cut. Also, the US dollar is well above the top of its Bollinger Band (2 standard deviations about the 20-day moving average). This has not happened for a couple of years. CAD bears may be better served waiting for a bounce to sell into rather than chase it here.