Why going long on GBP/CAD is a disguised USD play
City Index February 27, 2015 5:28 PM
<p>While Greece dominates the headlines it will also be a busy week for US data releases. And after three weeks of consolidation, the US dollar […]</p>
While Greece dominates the headlines it will also be a busy week for US data releases. And after three weeks of consolidation, the US dollar is about to resume its general bullish run. US 10-year yields have turned medium term bullish to bearish which could indicate a turning point for not only the greenback but also US equities.
So where can we take advantage of this shift?
US dollar pairs currently look crowded. EUR/USD still holds a significant number of speculative shorts and AUD/USD has plenty of bad news already priced in at this point. I like GBP/CAD higher as a disguised and less crowded USD play. The Bank of England will eventually follow in the Federal Reserve’s footsteps and there is some clear cyclical strength in the UK economy. Recently we saw better-than-expected employment figures and second estimate GDP confirmed that Q4 growth was 0.5%.
The Canadian dollar has come under significant pressure from the lower oil price. As the sixth largest exporter of crude oil, Canada’s economy has been hit by these deflationary pressures. The Bank of Canada highlighted these concerns when they cut rates last month.
I also think the CAD trade eventually evolves from an oil trade to a domestic trade, as housing softens and the economy struggles with a stream of poor data (including the retail sales figures that were released last week).
GBP/CAD currently sits near June 2009 highs of 1.9311, so this should act as a reasonably good resistance level. However, a close above here may lead the way for 1.9380 and a push towards 1.9470. If this level is broken we could head towards 1.9700.