The Canadian dollar strategy idea was a winner

The Canadian dollar, recommended as a strategic long at 1.46 soared violently from 1.335 to 1.3 in the two trading sessions after the Fed shock. The loonie has been the beneficiary of the swift rise in oil prices, broad-based US dollar selling, a surge in global risk assets as well as the consensus that Prime Minister Justin Trudeau's first budget will be pro-growth.
The risk reversal spreads in the foreign exchange markets suggest that Planet Forex no longer fears major loonie depreciation and is thus not willing to pay excessive put option premia for downside protection. The Canadian dollar bears have been short squeezed by the bulls in the past month as the momentum in the pace of the loonie decline suggests.
I now believe the next pivot level is 1.284 as the world positions for budget news from Ottawa. The Canadian dollar has accomplished one of the most violent, most profitable (this column was short loonie as it plunged since last September and long once I thought loonie bearishness had turned extreme and irrational at 1.46) bungee jumps in the history of the foreign exchange market. To me, the aesthetics, optics and two-way symmetry of this macro idea made it my forex obsession de jour in 2015 and 2016!
The recalibrated FOMC now projects two, not four, rate hikes in 2016. However, I wonder why the Fed had to mention its concern with "global financial and economic statements" not once but twice in its statement on a day that the core US consumer price inflation data showed a rise to 2.3 per cent.
The Yellen Fed has, in essence, moved its focus from US data dependence to international financial markets. Post G-20 Shanghai global politics could also explain Yellen's bizarre policy shift. After all, a softer US dollar reduces the risks of a global trade war that Trump or Clinton could well ignite in the autumn.
Unlike her husband, who authorised the US Treasury's bailout of Mexico in 1995, midwifed Nafta and the "strong dollar" policy of his second term, Hilary Clinton could well pressure the Fed to depreciate the US dollar in her quest to win the global currency war. If so, my new 1.28 target on the loonie, a classic petrocurrency, will prove a Sunday school picnic.
It is now consensus in the world currency markets that the US Dollar Index peaked at its 2015 high at 100. While we trade at 94.6 now after the FOMC, I do not subscribe to this 'peak dollar' consensus. US macroeconomic and data momentum is for too strong and relative central bank divergence with Tokyo, Frankfurt and yes, Ottawa, must reflect relative economic growth rates, now skewed entirely in the US dollar's favour, despite its pounding last week.
True, the US Dollar Index has traded/consolidated in a narrow range since its dramatic rise in 2014-early 2015, a chronicle that enabled us to print money shorting the Canadian dollar in the first place, with epic 25 per cent move from my original 1.06 short loonie level.
Of course, while currency fundamentals matter most in the end, I would not be surprised if the US Dollar Index now retests August 2015 lows at 92.6, which happens to be a classic 38.3 per cent Fibonacci retracement of the entire King Dollar rally that originally began in May 2014, when Brent was $110, Emaar/GCC equities near their peak and the Canadian dollar deliciously overvalued just below parity.
If this August low is violated, I will be forced to write the obituary of King Dollar since the trend is only your friend until the trend comes to an end. The August 2015 lows on the US Dollar Index implies 1.17 on the euro as the strategic target on this move. Can Dottore Draghi's monetary bazooka tolerate a strong euro? No, nien, non and nunca!
Recession risk in the US is a laughable concept, though embedded in Yellen's mind. After all, Q1 2015 growth is on track at the post Lehman two per cent trend and the crude oil/inventory drag is no longer a concern.
In fact, the Philly Fed now orders strength mean manufacturing PMIs could well rise and King Dollar is down but not out. Greenback weakness, while acute last week, can easily reverse with a vengeance with March payrolls. It is never prudent to be complacent in global foreign exchange markets.
Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at: matein@emirates.net.ae