Canadian Dollar Talking Points

USD/CAD trades again above the 50-Day SMA (1.2854) because it bounces again from a recent month-to-month low (1.2816), and the Federal Reserve rate of interest choice might hold the alternate charge above the shifting common because the central financial institution is anticipated to ship one other 75bp charge hike.

USD/CAD Climbs Back Above 50-Day SMA Ahead of Fed Rate Decision

USD/CAD makes an attempt to retrace the decline from the beginning of the week regardless of the larger-than-expected decline within the Conference Board’s Consumer Confidence survey, and the Fed’s mountaineering cycle might hold the alternate charge afloat because the US central financial institution adjusts financial coverage sooner than its Canadian counterpart.

As a end result, the Federal Open Market Committee (FOMC) charge choice might generate a bullish response in USD/CAD because the central financial institution prepares US households and companies for a restrictive coverage, and the alternate charge might proceed to commerce to recent yearly highs over the approaching months if the committee retains its present strategy in combating inflation.

Image of Atlanta Fed GDPNow model

Source: Atlanta Fed

However, the rising menace of a recession might drive the FOMC to ship smaller charge hikes because the Atlanta Fed GDPNow mannequin states that the “estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -1.6 percent on July 19, down from -1.5 percent on July 15,” and a shift within the Fed’s ahead steerage might produce headwinds for the US Dollar if Chairman Jerome Powell and Co. look to winddown the mountaineering cycle over the approaching months.

In flip, USD/CAD might mirror the worth motion from May if it struggles to carry above the 50-Day SMA (1.2854), and an additional decline within the alternate charge might gas the shift in retail sentiment just like the conduct seen earlier this yr.

Image of IG Client Sentiment for USD/CAD rate

The IG Client Sentiment report reveals 61.34% of merchants are presently net-long USD/CAD, with the ratio of merchants lengthy to brief standing at 1.59 to 1.

The quantity of merchants net-long is 6.30% larger than yesterday and 21.88% larger from final week, whereas the quantity of merchants net-short is 3.04% decrease than yesterday and seven.14% decrease from final week. The leap in net-long curiosity has fueled the flip in retail sentiment as 60.19% of merchants had been net-long USD/CAD final week, whereas the decline in internet brief place comes because the alternate charge bounces again from a recent month-to-month low (1.2816).

With that stated, the Fed charge choice might hold USD/CAD above the 50-Day SMA (1.2854) so long as the central financial institution retains the present course for financial coverage, however the alternate charge might largely mirror the worth motion from May if it fails to carry above the shifting common.

USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in thoughts, the failed try to check the November 2020 excessive (1.3371) has led to a near-term pullback in USD/CAD, with the alternate charge now buying and selling again above the 50-Day SMA (1.2854) after struggling to shut beneath the Fibonacci overlap round 1.2830 (38.2% retracement) to 1.2880 (61.8% growth).
  • In flip, USD/CAD might push in the direction of the 1.2980 (618% retracement) space because it makes an attempt to retrace the decline from the beginning of the week, however the alternate charge might largely mirror the worth motion from May if it struggles to carry above the shifting common.
  • A detailed beneath the overlap round 1.2830 (38.2% retracement) to 1.2880 (61.8% growth) brings the 1.2770 (38.2% growth) space on the radar, with a transfer beneath the 200-Day SMA (1.2713) opening up the 1.2610 (50% retracement) to 1.2650 (78.6% growth) area.
  • Need a break/shut above 1.2980 (618% retracement) to carry the 1.3030 (50% growth) to 1.3040 (50% growth) area again on the radar, with the following space of curiosity coming in across the 1.3200 (38.2% growth) deal with.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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