EUR/CAD Headed Back to 1.40

EUR/CAD Headed Back to 1.40

Fundamentals

From a fundamental and technical perspective, we believe EUR/CAD is headed back down to 1.40. The euro was hit hard today by the talk of corporate bond buying by the European Central Bank. If true it would be another step by the ECB to increase stimulus. Corporate bond buying is complex and difficult to implement but the mere fact that this is a possibility reinforces the central bank’s bias to ease. The euro is in play this week with the PMI reports scheduled for release on Thursday and the bank stress tests results due on October 26. Given the recent deterioration in Eurozone data, we expect the PMI reports to show a further slowdown in economic activity that should keep pressure on the euro. At the same time, tomorrow’s retail sales report and Bank of Canada rate decision should be positive for the CAD. The loonie has become deeply oversold due to the decline in oil prices but based on the uptick in job growth, increase in core prices and weakness of the exchange rate, the statement could be less dovish, leading to a much needed reversal in USD/CAD. Canada is widely expected to raise rates after the Fed and before the BoE, which makes the CAD a bargain against the euro.

Technicals

The 1% decline in EUR/CAD on Tuesday is a reflection of significant weakness for the currency pair. However according to the weekly chart shown below, the key level to watch is 1.4265, the 38.2% Fibonacci retracement of the 2012 to 2014 rally. If this level is broken in a meaningful way and it appears that it will, the next main area of support is 1.40. On the upside, 1.45 is resistance.

Chart Of The Day

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