By: Andrea Cohen
It seems like everyone is the FX world has been concentrating on two main themes in the last few weeks: Cyprus and Japan. The consequences to the EUR from the unfolding of the crisis in Cyprus are yet to be fully determined because, as bad as things are there, is a minor economy in terms of size. The rest of the troubled nations in the Union watched very carefully how political and financial powers struggled there to reach the current understandings. In Japan, the new administration and leadership of the BoJ are wreaking havoc in the JPY markets; for example the USD-JPY daily volatility has doubled since the December election relating to the 9 months preceding it.
Since these markets are both very volatile and crowded, we suggest looking at North America for this week’s trade idea.
Last Friday, the March Non-Farm Payroll (NFP) number from the US had come in well below expectations. A print of +88K vs. expectations of +190K, this could mark the beginning of a slowdown in the recovery of the US economy. The first to get hurt by this slowdown are US equities. There is a significant correlation between changes in NFP and S&P 500 futures.
Next is the close relationship between CAD and US equities. The chart below demonstrates this relationship very well:
The many tangents of American and Canadian economies, the fact theta the US is Canada’s main trade partner and the US role in the world’s economy in general, make the CAD very sensitive to that market.
We have mentioned the Cyprus situation at the beginning of the piece, but it actually has an effect on the CAD as well. The CAD (together with the Scandinavian currencies and until 2011 the Swiss Franc) is considered a safe-haven currency. In times of trouble we see real money managers moving into the CAD to park their cash as the Canadian economy is considered a solid one with low volatility and conservative sentiment. Such movement of cash has been evident when the banks in Cyprus froze deposits a few weeks ago. As it was unclear how things will unfold and the fear of the consequences of a refusal and/or civilian uprising to the rest of the Eurozone and the EUR, a lot of cash went into the CAD. Now that the deposit tax had been agreed upon and the message to other countries was loud and clear, the risk in EUR is not as significant as before and we expect to see cash leaving the CAD for that reason.
The USD-CAD is currently at 1.0175. We think it can reach 1.04 easily within the next 3 months. If you do follow up on this idea, do not forget the risks (mainly that positive data will come out of the US in the near future, reversing the trend) and impose a stop-loss (1.005 we think).