Trade Idea of the Day: USD/CAD's bearish commodity signal

With friends like the United States, Canada needs no further enemies right now.

USD/CAD’s bearish commodity signal

With friends like the United States, Canada needs no further enemies right now. In the weird world we've inhabited since Donald Trump became President, the U.S.’s biggest single-trading partner is also the recipient of some of the harshest criticism of a close ally for decades.

With NAFTA in tatters and Canada also ensnared in U.S. tariffs on key steel-making nations, it may be little wonder the Canadian dollar is leading the downside vs. the greenback amongst major currencies.

The extent of possible escalation against Canada is unclear. But given the country’s preeminent trading status with the U.S. and huge dependence on commodities, the beginnings of a severe hit are being priced into the loonie.

One way to visualise this is by means of the technical chart below. The chart also includes a proxy for important commodity metals, including iron ore and others, to which Canada has much exposure. The metals asset is Invesco’s DB Base Metals Fund, an ETF. We have inverted the ETF's values so that prices can be superimposed on the USD/CAD chart.

We immediately note that both Canadian dollar and base metals ETF have sharply reversed recently. (USD/CAD up = $C falling; ETF likewise).

USD/CAD has also broken out of a clear falling wedge. The wedge is a continuation pattern pointing higher, hence bearish for $C. With the commodity ETF tracking the loonie with a lag, the structure warns that a possible severe slump for base metals lies ahead. USD/CAD was near its 21st June 2017 reversal high of $1.3347 at the time of writing. A clean break above it would corroborate the $C sell-off further. If resistance is shown, a pause in $C's fall – and perhaps for key commodity metals – might be signalled.

Technical analysis chart: USD/CAD and Invesco Base Metals ETF

Source: Reuters/City Index

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