Trading Desk Notes - April 29thSubmitted by Polar Futures Group on April 28th, 2017
Our thoughts on select markets as we wrap up the trading week.
CAD: The Canadian dollar had a second consecutive soft week, breaking below 74 cents to new 14 month lows. Only 2 other months (November and December 2015) have had a lower monthly close in the past 13 years! We have remained bears of the Canadian dollar to varying degrees over the past several years, but have been adamant the last few months about the downside risks CAD faced. We have had a “laundry list” of issues with CAD that range from 1) short term USD interest rate spread premiums 2) lower crude oil prices could be a HUGE risk 3) Canadian debt, as households get WAY over levered to real estate 4) trade uncertainties as Trump turns tough on Canada 5) a stronger USD as the Trump administration works towards pro-business policies. CAD has been weakening even though the USD has been soft, any renewed USD strength will only add downward pressure on CAD. Given these head winds we continue to believe that CAD could be trading closer to 70 cents in the coming months.
Bloomberg Chart above: CAD(main white line) with oil prices (blue line) and 2yr interest rate spreads between Canada and the US(orange). Shows the "tug of war" CAD is in and the vulnerability to lower oil prices.
USD: The USD has been down for the past three weeks, with this week’s move lower largely due to the EUR surging higher on the outcome of the first round of the French election. However the odds of an interest rate hike in June have been increasing again over the past couple of weeks, now at 70%, which may provide strength to the USD as we go into this Wednesdays Fed meeting. We also have US employment numbers next Friday that will be key to the USD direction. Both the ECB and BoJ had meetings this week and largely maintained the status quo of “optimistic, but in no hurry to change policy”.
Oil: WTI was marginally lower this week, but largely staying under $50 for the duration. We continue to see the supply/demand story in a negative light, even if OPEC and non-OPEC were to extend their production cuts. US producers have added drilling rigs for 15 straight weeks, which has delivered further US oil production increases. We believe the significant move lower in oil will come on a break of last month’s low of $47 as the roughly 640K speculative long positions would begin to unwind.
Precious Metals: Gold prices held fairly steady this week as geopolitical headlines continue, especially a “Major, Major conflict” with North Korea. Silver prices have vastly underperformed the gold market over the past two weeks. Both gold and silver had held record speculative long positions last summer as gold hit $1,375, price declines brought position sizes back to normal levels. We attribute this underperformance of silver to the fact that speculators rushed back into silver, setting new all-time high long positions, while position building in gold has only been moderate. This record setting speculative long position in silver is likely getting liquidated as silver has been down 9 of the last 10 trading days.
Bloomberg Chart above: Gold(blue) & Silver(orange) with prices on the top pane and the non-commercial speculative position on the bottom pane. This shows the more dramatic build of speculative positions in silver since the turn of the year.