- BOC hike odds are below 20% for today, around 35% for January, and above 75% for January. The market may be too dovish; the risk today is for a more hawkish BOC.
- USD/CAD's two-month range between 1.2665 and 1.2910 looks ready to break to the downside, with a double top target of 1.2420.
- Retail trader sentiment suggests mixed trading conditions in the US Dollar through the first full week of December.
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The US Dollar is continuing to meander around, with the DXY Index below the October 26 swing low of 93.48, which has seemingly served as resistance since the breakdown on November 22. While a close through said level would also represent a bullish break above the daily 21-EMA, one could make an argument that the US Dollar was on solid footing heading into the middle of the month.
Yet given the schedule of upcoming event risk, one has to be wary of any short-term gains that emerge for the US Dollar. While the November US Nonfarm Payrolls report this Friday is expected to be a solid one (forecasts call for +197K jobs added and the unemployment rate to stay on hold at 4.1%), it shouldn't have a material impact on what the Federal Reserve does next week at their last policy meeting of the year: Fed funds have been pricing in a 100% chance of a 25-bps rate hike in December since October 26.
Given that inflation readings of recent have disappointed, there seems to be a strong chance that the FOMC revises lower its 2018 inflation expectations, and thus, its glide path for interest rates. This won't surprise the market, as market expectations have deviated quite sharply from the FOMC's own (a problem for the US Dollar, but not for US equity markets).
While there is still some time for price action to develop between now and next Wednesday's FOMC meeting, the general idea is to look for US Dollar short setups ahead of next week. One such pair that looks primed for a big move is USD/CAD, sitting at support of a two-month range before the Bank of Canada meets later today.
Chart 1: USD/CAD Daily Timeframe (July to December 2017)
The Canadian Dollar has had a volatile 2017, and much of it has to do with pricing around potential BOC policy decisions. In early-June, there was less than a 10% chance of a rate hike for the rest of 2017. By mid-July, not only had one rate hike actually been priced-in – and the BOC did hike – but a second hike was being priced-in for the end of the year. Eventually, this transpired in September with markets pricing a third hike in for 2017. This hawkish perception proved to be overdone, with the market-implied odds of a BOC hike this week now below 20%.
Looking down the calendar, March 2018 comes in as the most likely period for the next rate hike (75% chance). As such, even if the BOC does not hike this week, expectations are high that they will continue to prep markets for further policy tightening in the months ahead.
Accordingly, a move below range support of 1.2665 would trigger a double top formation (measured between 1.2665 and 1.2910) pointing to an eventual decline towards 1.2420 over the coming weeks. With USD/CAD trading below its daily 8-, 13-, and 21-EMAs, as well as with MACD and Stochastics trending lower, the pairs seems primed for a breakdown if just given a small 'push' - a more hawkish BOC today would do the trick.
Chart 2: USD/CAD IG Client Sentiment Index (June to December 2017)
USD/CAD: Retail trader data shows 50.0% of traders are net-long with the ratio of traders long to short at 1.0 to 1. The number of traders net-long is 2.8% lower than yesterday and 15.4% higher from last week, while the number of traders net-short is 6.3% higher than yesterday and 22.3% lower from last week. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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