By Rob Samson

The Canadian dollar (CAD) is being sold on Wednesday and we struggle to understand why. However, we note that the outlook could once again be turning back to favour the USD over the CAD again.

UPDATE: We hear from ForexLive that the selling in CAD has been helped along by Canadian Natural Resources buying around $2.8bn of US natural gas assets via Devon Energy. Devon are said to be selling up various parts to focus on shale.

There is no obvious trigger for the weakness in CAD being seen today, however it could be in sympathy with the negative market tone observed heading into the North American open with the USD gaining strength, equities pointing to a red open and the US 10‐year dropping back to 2.68%.

A look at the Canadian dollar exchange rate complex shows:

The pound sterling to Canadian dollar exchange rate (GBP/CAD) is 0.27 pct higher at 1.8318.The euro to Canadian dollar exchange rate (EUR/CAD) is 0.27 pct higher at 1.5106.The US dollar to Canadian dollar exchange rate (USD/CAD) is 0.28 pct up at 1.0990.(Be Aware: All CAD quotes here refer to the wholesale spot market. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.)

Camilla Sutton at Scotiabank offers an interesting insight into today's Canadian dollar action:

"Most notable has been how CAD has begun trading in tandem with copper again (see middle chart) suggesting" that global growth is a renewed focus for CAD traders (and highlighting the risk associated with tomorrow's Chinese HSBC flash PMI."

That said we note that high-grade copper prices are actually higher, this as CAD heads lower, so the picture remains hard to call.

Outlook favours the US dollar over the Canadian dollar

The importance of a strengthening US dollar would be the most likely explanation for the weakness being seen in the CAD complex today.

But what does the outlook hold for the CAD? According to TD Securities analyst Shaun Osborne now is the time to ready for a fresh rally in the USD/CAD exchange rate:

"We think risk reward is starting to favour USD longs again.

"Firstly, the correction lower has taken back about half of the January rally in USDCAD and the market is nearing key supports in the form of the 50% retracement support derived from that move and the 40-day MA (see daily chart, above).

"Secondly, the looming run of tier 1 Canadian data are likely to make for poor reading; we look for weak December retail sales (albeit weather related) and for January CPI data to show no significant pick up in inflation from December.

"We had thought that USDCAD would test the 1.09 area after it became clear that this correction was a little more meaningful than other seen since late September.

"But the drop in funds may pull up a little short of that; the news flows starts to turn a little more obviously negative for the CAD today ahead of Friday’s key data —we look for below consensus manufacturing sales—and the market may start to pick up on possible implication of the news report noted above that China’s CIC sovereign wealth fund is dumping commodity investments.

"Short-term price action is starting to look more constructive for USDCAD and signals suggest that a short-term low—at least– may be forming just above the 1.09 area.

"The 1– and 6-hour candle charts are building bull reversal patterns right at key support. We think current levels are attractive entry points for USD longs."