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USDCAD Rate Risks Bearish Behavior as Fed and BoC Take Different Paths

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Canadian Dollar Talking Points

USDCAD trades near the yearly-low (1.3037) even though the Bank of Canada (BoC) endorses a wait-and-see approach for monetary policy, and recent price action keeps the downside targets on the radar as the exchange rate fails to break out of the monthly opening range.

USDCAD Rate Risks Bearish Behavior as Fed and BoC Take Different Paths

The recent rebound in USDCAD has flopped ahead of the monthly-high (1.3145) as Federal Reserve Chairman Jerome Powell strikes a dovish tone in front of US lawmakers, and the exchange rate may exhibit a more bearish behavior over the coming days as the Federal Open Market Committee (FOMC) appears to be on track to implement a rate cut on July 31.

In contrast, the BoC may stick to the sidelines throughout 2019 as “growth in the second quarter appears to be stronger than predicted,” and the central bank may stick to the same script at the next meeting on September 4 as “recent data show the Canadian economy is returning to potential growth.

It seems as though the BoC will take a different path compared to the FOMCwith the US slowing to a pace near its potential,” and the diverging paths for monetary policy may fuel a further shift in USDCAD behavior as the exchange rate snaps the upward trend from earlier this year.

Image of DailyFX economic calendar

Keep in mind, updates to Canada’s Consumer Price Index (CPI) may rattle the recent strength in the Canadian Dollar as the gauge is expected to narrow to 1.9% from 2.4% per annum in May, but a one-off downtick in the headline reading for inflation may do little to alter the monetary policy outlook as Governor Stephen Poloz and Co. insist that “CPI inflation will likely dip this year because of the dynamics of gasoline prices and some other temporary factors.

In turn, USDCAD stands at a risk of exhibiting a more bearish behavior over the remainder of the year, with recent price action bringing the downside targets back on the radar as the rebound from earlier this week fails to take out the monthly-high (1.3145).

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USD/CAD Rate Daily Chart

Image of usdcad daily chart

  • The broader outlook for USDCAD is no longer constructive as the advance from the April-low (1.3274) stalls ahead of the 2019-high (1.3665), with the break of trendline support raising the risk for a further decline in the exchange rate.
  • The break of the February-low (1.3068) suggests there’s a broader shift in USDCAD behavior, but the failed attempt to break/close below the 1.3030 (50% expansion) region may generate range bound conditions amid the lack of momentum to hold above the Fibonacci overlap around 1.3120 (61.8% retracement) to 1.3130 (61.0% retracement).
  • A break/close below the 1.3030 (50% expansion) region brings the 1.2970 (78.6% retracement) to 1.2980 (61.8% retracement) region on the radar, with the next area of interest coming in around 1.2830 (38.2% retracement).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.



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Forex

Crude Oil Prices May Be Plotting a Return to $40/Barrel WTI

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CRUDE OIL & GOLD TALKING POINTS:

  • Crude oil prices rebuild link with broader sentiment trends
  • Technical setup hints a test above $40/bbl might be ahead
  • Gold prices edge down, struggle to make good on breakout

Crude oil prices edged up against the backdrop of a cautious improvement in risk appetite at the beginning of the trading week. The WTI benchmark paced a rise in S&P 500 index futures. The correlation between the two has been rebuilding recently, suggesting that idiosyncratic factors – notably, the recent struggle to extend the OPEC+ output cut scheme – are giving way to broader sentiment as the main driver of price action.

Gold prices likewise echoed the broader market mood. The metal inched lower as Treasury bond futures flagged higher yieldsagainst the risk-on backdrop, undermining the appeal of non-interest-bearing assets.

On balance, this seems to set the stage for sentiment to continue to drive. A dearth of noteworthy event risk hints that the pro-risk tilt already in play faces relatively few discernible roadblocks, opening the door for follow-through. True trend development may prove elusive howeveras news-flow dries up and volumes dwindle in thin holiday trade. Pace-setting markets in the UK and the US will remain shuttered.

CRUDE OIL TECHNICAL ANALYSIS

Crude oil prices are consolidating gains after clearing resistance at 32.81, the 50% Fibonacci retracement. This level has held up to being retested as support, suggesting the next move might be a further foray to the upside. Resistance is in the 40.56-42.40 area, with a daily close above that exposing former support clustered around the $50/bbl figure. A turn back below the 38.2% Fib at 25.07 is probably a prerequisite for neutralizing immediate upward pressure.

crude oil price chart - daily

Crude oil price chart created using TradingView

GOLD TECHNICAL ANALYSIS

Gold prices are struggling to find upside follow-through after breaking out of a bullish Symmetrical Triangle pattern. Negative RSI divergence suggests upside momentum is ebbing, which may set the stage for a reversal lower. Taking out minor support at 1715.15 exposes a seemingly more durable barrier at 1679.81, followed by the 38.2% Fibonacci retracement at 1645.40. Invalidating topping cues probably requires a daily close above the May swing top at 1765.30.

Gold price chart - daily

Gold price chart created using TradingView

COMMODITY TRADING RESOURCES

— Written by Ilya Spivak, Head APAC Strategist for DailyFX

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter



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US Dollar, Dow Jones, Australian Dollar, Crude Oil

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US benchmark stock indexes – such as the S&P 500, Dow Jones and Nasdaq Composite – aimed cautiously higher this past week. Yet, Wall Street has been struggling to find material upside follow-through since late April with the aggressive pace in gains since March noticeably ebbing. The sentiment-linked Australian Dollar and New Zealand Dollar were unable to follow equities.

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Most of the upbeat tone occurred early on in the week as Moderna reported degrees of success in a virus vaccine trial. Yet investors’ confidence waned after this was critiqued and as China unveiled a national security law on Hong Kong that sent the Hang Seng tumbling 5.56% on Friday. The haven-linked US Dollar and similarly-behaving Japanese Yen cautiously rose this past week.

Growth-oriented crude oil has been on the rise, suggesting markets may be looking forward to gradual lockdown easing measures across the globe. Central bankers have been warning about the long-term impact on growth, particularly if additional virus waves unfold. Over 38 million citizens in the world’s largest economy have filed for unemployment claims. This may top 40m ahead.

Conference Board Consumer Confidence and University of Michigan Sentiment data will reveal how attitudes are shaping in a nation where 2/3 of GDP is in consumption. Australia’s Prime Minister speaks to the National Press Club in Canberra as tensions with China brew. These woes may bring back trade war fears, complicating efforts to economically recover from the virus.

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Fundamental Forecasts:

Euro Forecast: EUR/USD Outlook Lifted Long-Term by Recovery Fund Plan

The long-term outlook for the Euro has been boosted significantly by a Franco-German proposal for a €500 billion coronavirus Recovery Fund, even though an agreement is not yet close.

Gold Price Outlook Bearish on GDP Data, US-China Tension and Covid-19

Gold prices may face heightened liquidation pressure as US-China tensions over Hong Kong heat up ahead of US GDP data amid the coronavirus pandemic.

Australian Dollar Faces Data Drought, RBA Silent so Covid Will Drive

The Australian Dollar market is headed for a bare domestic data cupboard which will once again leave overall market risk appetite in charge. This may well mean it remains stuck in its current range.

USD/MXN Outlook: Downside Pressure Continues as Investors Cheer Drug Hopes

The possibility of a Covid-19 cure by year end keeps market sentiment high despite ongoing political tensions

US Dollar Outlook: US-China Tensions Complicate Virus Recovery Bets

The US Dollar may find some strength if tensions between the US and China keep rising, adding an extra layer of uncertainty to the global economic outlook amid the coronavirus outbreak.

S&P 500, Nasdaq 100, DAX 30 Forecast for the Week Ahead

The S&P 500 and Nasdaq will look for developments in US-China tensions while the DAX 30 awaits a string of regional data. Possible coronavirus vaccines may also influence sentiment in the week ahead.

Technical Forecasts:

GBP/USD Forecast: Pound Weakness to Persist Amid Break of April Low

The British Pound has depreciated against all of its major counterparts so far in May, and the weakness may persist as GBP/USD takes out the April low (1.2164).

Crude Oil Weekly Outlook: Rally Runs Into Resistance as Risk-On Appetite Stalls

Crude oil sold-off Friday on news that China is looking to introduce stringent new security laws in Hong Kong, damaging global risk appetite.

S&P 500, FTSE 100 Technical Outlook For Next Week

S&P 500 faces pivotal resistance, while FTSE 100 continues to trade in rangebound fashion.

Gold Price Trend May Reverse as the Rally Loses Steam Near $1800 Gold prices

have enjoyed impressive gains in recent weeks but momentum seems to ebbing on approach to $1800/oz. A reversal downward may be brewing ahead.

US DOLLAR WEEKLY PERFORMANCE AGAINST CURRENCIES AND GOLD

US Dollar Weekly Performance vs currencies and Gold



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Euro Outlook Appears Bearish Ahead of German IFO Data

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Euro, EUR/USD Analysis, German IFO Data – Talking Points

  • Euro could fall if German IFO statistics underwhelm investors
  • Slower growth out of largest Eurozone economy may hurt Euro
  • EUR/USD rejected for third time at key resistance – now what?

Asia-Pacific Recap

Asia’s start to the week had a mixed reading. US equity futures pointed higher while FX markets remained broadly mixed, a similar dynamic mirrored in APAC stocks. The economically-light data docket puts the focus on fundamental trends with most investors likely watching medical metrics. Economic and monetary policy in the current environment will likely be designed based on what they show.

Euro Outlook Bearish Ahead of German IFO Data Release

The Euro may face higher selling pressure following the publication of German IFO data. Preliminary forecasts for the business climate component are estimated to show a 78.3 print, slightly higher than the prior 74.3 reading. The current conditions and expectations statistics are also anticipated to show an improvement in sentiment as Germany eases its lockdown measures.

However, final prints for Q1 GDP data on a year-on-year and quarter-on-quarter basis may dampen sentiment as all figures are anticipated to show a negative figure. Data out of Germany has a tendency to elicit higher-than-usual volatility relative to its neighbors’ statistics due to it being the largest economy in the region. Consequently, its economic trajectory has larger implications for Europe as a whole and by extent, the Euro.

Coronavirus Cases Globally

Euro Outlook Appears Bearish Ahead of German IFO Data

Source: Johns Hopkins CSSE

EUR/USD Analysis

EUR/USD has for a third time been rejected at a stubborn resistance range between 1.0981 and 10989. The pair may now limp back to another equally-obstinate support level at 1.0783. These price parameters have kept EUR/USD range-bound for over a month, suggesting an underlying ambiguity in regards to a directional bias. However, if either parts of the range capitulate, it may signal a change in the pair’s outlook.

EUR/USD Analysis

Chart showing EUR/USD

EUR/USD chart created using TradingView

— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter



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