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Is USD/CAD's Slide Foreshadowing More USD Weakness to Come?

Is USD/CAD's Slide Foreshadowing More USD Weakness to Come?

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Most USD-pairs quiet today, although GBP/USD has rebounded on the back of faster than expected inflation pressures in UK.

- USD/CAD tends to lead USD-pairs; the sharp fall preceding the June FOMC meeting hints of more downside for the greenback.

- Retail crowd positioning shows that traders maintain long US Dollar positions, which is a contrarian indicator for more losses.

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We've entered the volatility vortex that typically drains significant market activity in the run-up to this week's Federal Reserve policy meeting. Usually in the 24-48 hours preceding a FOMC gathering, FX markets tend to cool off and only small, intraday ranges develop as traders await new guidance before staking out their next positions.

Yet the writing is on the wall for tomorrow's FOMC meeting to be a disappointing one for the US Dollar. Faced with an economy that is showing signs of slowing down, the FOMC will likely raise rates by 25-bps (100% chance per Fed funds futures) but make additional changes that imply a more dovish policy path going forward. By cutting their inflation forecast, for example, or by reducing their glide path of policy rates, the Fed could signal to the market that the long-awaited 'faster rate hike cycle' isn't coming this year.

Ahead of the June FOMC meeting, one pair in particular is making waves: USD/CAD. Representing the economy sharing the closest bonds with the US, the Canadian Dollar tends to price in data/events that impact the US Dollar rather quickly, akin to how the British Pound and the Euro generally trade in a similar fashion.

The Canadian Dollar strength comes divorced of any significant move in Crude Oil, whose lackluster performance the past few weeks has had little sway over the Loonie. While only constituting a small portion of the DXY Index (CAD is a mere 9.17%), the fact that USD/CAD has declined so sharply in advance of Wednesday's policy meeting should be seen as foreshadowing additional US Dollar weakness to come in the days ahead.

Elsewhere, FX markets are generally quiet. EUR/USD is levitating above last week's lows, while AUD/USD and USD/JPY appear to be treading water. The most notable move among the major currencies comes from the British Pound, which has gained marginally after data this morning revealed faster than anticipated inflationary pressures. Whether or not the faster inflation holds influence over the Bank of England will be determined at Thursday's BOE rate decision.

See the above video for technical considerations and levels to watch for in EUR/USD, GBP/USD, USD/CAD, NZD/USD, USD/JPY, EUR/NZD and DXY Index.

Read more: DXY Index Slips Just Days Before June FOMC Meeting

--- Written by Christopher Vecchio, Senior Currency Strategist

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.