In the last 48 hours, many less than nimble short-term USDCAD traders have been stung by sharp reversals following the break of key support and resistance levels.  Wednesday's washout of long USDCAD positions was exacerbated by the early release of the Fed's Janet Yellen testimony. Suddenly, any near-term thoughts of tapering evaporated and the dollar was sold versus Canada and the majors. 

Just as quickly, the dollar reversed course when traders apparently conceded that Yellen's stance was "old news". USDCAD ended the day with a bid tone and started Thursday the same way. Evidence of diverging Eurozone and US growth, and expectations of soft Canadian trade data in the face of bullish USDCAD technicals, created early USDCAD demand. The Canadian trade data surprised the consensus (CAD one billion deficit) and narrowed to CAD 0.44 million.

Traders were not impressed as the improvement was mostly due to energy exports. Neither US jobless claims nor a wider US trade deficit had any impact on USDCAD trading. It was a slow grind higher until the morning option expiry when USDCAD spiked to 1.0526. However, instead of following through with this break of key resistance in the 1.0505-15 area, the US dollar backed off and then plunged, finally coming to rest at 1.0462.

Freaky Friday?

USDCAD kicked off in Asia looking offered but resting on support at 1.0460.  Eurozone CPI data may provide some US dollar support if it is weaker than forecast due to renewed chatter of further ECB rate actions. The data from the US today which includes Empire manufacturing, capacity utilisation and wholesale inventories will likely be a non-event, overshadowed by yesterday's Yellen testimony. She was quoted as saying "I consider it imperative that we do what we can to promote a very strong recovery". These words have many fading a Q1 tapering program. Fridays are known for freaky FX moves but the recent price action means today will be an oasis of inactivity giving traders time to plot next week's strategy.  

New Fed chairman — more questions than answers

There have been millions of words written about Janet Yellen and how she will steer the Federal Open Market Committee (FOMC) with some analysts even reviewing her old speeches to determine her current state of mind on all things economic.  As fun as that exercise sounds, the question is "why"?

At the risk of oversimplifying things, the only real change is in chairs. Yellen and Ben Bernanke will just swap chairs. Yellen is now the "face" of the Fed, albeit, one with less facial hair but she still only has one vote. If her public opinion of Bernanke is any way close to her real feelings, than it is not a stretch to assume that the FOMC will continue to operate in the future, the way it has for the past few years.

If so, the FOMC's stated position of tapering when the data supports a sustained recovery would suggest that it doesn't matter whether it is Yellen or Bernanke sitting in the chairman's seat.

Pouring oil on the Loonie

The depressed price of West Texas Intermediate (WTI) is only part of the oil-low Loonie equation. The main source of Canada's oil wealth is in landlocked Alberta. The highly touted Phase 3 and 4 of the Keystone pipeline expansion is suffering serious delays in obtaining approval and President Obama is not a fan. (Perhaps he thinks Air Force 1 and his limousine entourage are solar powered).

The Canadian product is Western Canada Select (WCS) which is the source of the bulk of revenue for Canadian oil companies. However, this product is trading at a USD 37.16 per barrel discount to WTI in part due to lower demand because of refinery outages, increased production and transportation constraints.  A JPMorgan analyst suggests that a USD 40 bbl discount is usually associated with a USDCAD level 3.7 to 3.5 percent higher.