USD/CAD Analysis

• BoC minutes largely dismissed by markets due to recent dismal Canadian economic data.
• Fed Chair Jerome Powell speech in focus later today.
• USD/CAD holds around the 1.38 handle as bearish divergence threatens.

USD/CAD Fundamental Backdrop

Markets ‘dovishly’ repriced Fed rate hike expectations after the Non-Farm Payroll (NFP) miss last week which could have been a slight overreaction in my opinion. Additional incoming data will be required to properly gauge the status of the US economy. Mr. Powell may well leave the door open for potential hikes if necessary and pushback against talk of rate cuts.

From a Canadian perspective, the Bank of Canada (BoC) Summary of Deliberations were released last night and contained hawkish messaging. This report di little to negate CAD downside due to subsequent economic data that was released. Some key statements are shown below:

“Council members agreed to revisit need for rate hike at future decisions with benefit of more data, agreed to state clearly they were prepared to raise the rate further if needed.”

“Council members acknowledged further tightening would likely be required to restore price stability.”

The December rate announcement (according to money market pricing) looks to be in favor of a rate pause at 5% with almost 100% certainty (refer to table below) with the first round of rate cuts projected around June 2024.

BANK OF CANADA INTEREST RATE EXPECTATIONS

Source: Refinitiv

Crude oil prices (a key Canadian export) has been a major contributor to loonie weakness of recent but with OPEC+ likely concerned around the sharp decline, an extension of voluntary production cuts may be announced in due course – a potential silver lining for CAD bulls.

TECHNICAL ANALYSIS

USD/CAD DAILY CHART

Chart prepared by Warren Venketas, IG

USD/CAD price action above shows apparent bearish/negative divergence on the daily chart with the Relative Strength Index (RSI) exhibiting lower highs while USD/CAD prices print higher highs. The pair remains within the longer-term upward trending channel but could see a retest of channel support should crude oil prices push higher alongside a possible weaker US dollar.

Key resistance levels:

• 1.3899
• 1.3800

Key support levels:

• 1.3700
• 1.3668/Channel support
• 50-day MA (yellow)

IG CLIENT SENTIMENT DATA: MIXED

IGCS shows retail traders are currently prominently SHORT on USD/CAD , with 71% of traders currently holding long positions (as of this writing).

https://www.dailyfx.com/news/forex-canadian-dollar-outlook-boc-minutes-unable-to-propel-cad-ahead-of-powell-wv-20231109.html