Canadian Dollar Talking Points
USD/CAD trades to fresh monthly lows following the limited reaction to the US Non-Farm Payrolls (NFP) report, and the exchange may struggle to retain the advance from the June low (1.3315) as it snaps the ascending channel formation carried over from the previous month
USD/CAD Rate Outlook Mired by Failed Attempt to Test June High
USD/CAD appears to have changed course following the failed attempt to test the June high (1.3801), and the reversal from the March low (1.3315) may continue to unravel in July as the update to Canada’s Employment report is anticipated to show a more meaningful recovery in the labor market.
Until then, the break of channel support may push USD/CAD to fresh monthly lows as it carves a series of lower highs and lows, but it remains to be seen if the rebound in job growth will influence the monetary policy outlook as Bank of Canada (BoC) Governor Tiff Macklem rules out a V-shape recovery.
It seems as though the BoC will retain a dovish forward guidance over the coming months as “the Bank maintains its commitment to continue large-scale asset purchases until the economic recovery is well underway,” but Governor Macklem and Co. appear to have little interest to deploy more non-standard measures in 2020 as “the Bank’s focus will shift to supporting the resumption of growth in output and employment.”
In turn, the BoC may stick to the sidelines at the next interest rate decision on July 15 as officials “expect growth to resume in the third quarter,” and the update to the Monetary Policy Report (MPR) may reveal a gradual shift in the forward guidance as “the Bank is reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations.”
With that said, key developments coming out of Canada may keep USD/CAD under pressure in July if the BoC tames speculation for additional monetary support, and the exchange rate may struggle to retain the advance from the June low (1.3315) as it snaps the ascending channel formation carried over from the previous month.
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USD/CAD Rate Daily Chart
Source: Trading View
- Keep in mind, the USD/CAD rally at the start of 2020 emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the exchange rate breaking out of the range bound price action from the fourth quarter of 2019 to clear the October high (1.3383).
- However, the correction from the 2020 high (1.4667) managed to fill the price gap from March, with the pullback in the exchange rate pushing the Relative Strength Index (RSI) into oversold territory for the first time since the start of the year.
- Recent developments in the RSI indicated a potential shift in USD/CAD behavior as the oscillator broke out of the downward trend from May, but the reversal from the March low (1.3315) appears to have stalled following the failed attempt to test the June high (1.3801).
- As a result, USD/CAD may continue to carve a series of lower highs and lows over the coming days as it snaps the ascending channel formation carried over from the previous month, with a break/close below the 1.3510 (38.2% expansion) to 1.3540 (23.6% retracement) region opening up the Fibonacci overlap around 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement).
- Next area of interest comes in around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement), which lines up with the June low (1.3315), followed by the 1.3250 (23.6% expansion) region.
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— Written by David Song, Currency Strategist
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