Talking Points:

- USD/CAD Advance Stalls, RSI Pulls Back From Overbought Territory on Strong Canada Employment.

- USD/JPY Continues to Eye 116.00 Hurdle; Bullish Series at Risk Ahead of FOMC & BoJ Meeting.

DailyFX Table

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

USD/CAD

1.3475

1.3515

1.3422

36

93

USD/CAD Daily

USD/CAD Rally Stalls, RSI Buckles Following Upbeat Canada Employment

Chart - Created Using Trading View

  • USD/CAD pares the advance from earlier this week as Canada Employment unexpectedly increased 15.3K in February, with the exchange rate at risk for further losses as the Relative Strength Index (RSI) struggles to hold in overbought territory; failed attempt to test the November high (1.3599) may push dollar-loonie back towards the lower end of the 2017-range, but the broader outlook remains constructive as the pair continues to operate within the ascending channel carried over from the previous year.
  • The 105.1K expansion in full-time positions may encourage the Bank of Canada (BoC) to adopt an improved tone at the next policy meeting on April 12, but the ongoing weakness in the Labor Force Participation rate may keep the central bank on the sidelines as ‘subdued growth in wages and hours worked continue to reflect persistent economic slack in Canada;’ as a result, Governor Stephen Poloz and Co. may increase their efforts to tame interest rate expectations and endorse a wait-and-see approach for monetary policy especially as ‘the Bank’s three measures of core inflation, taken together, continue to point to material excess capacity in the economy.
  • With limited data prints coming out of Canada next week, the Federal Open Market Committee (FOMC) meeting is likely to shape the near-term outlook for USD/CAD as the central bank is scheduled to release its updated projections for growth, inflation and the interest rate, but the lack of momentum to hold above the Fibonacci overlap around 1.3450 (23.6% retracement) to 1.3460 (61.8% retracement) may open up the downside targets, with the first region of interest coming in around 1.3360 (38.2% retracement).

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

USD/JPY

115.14

115.51

114.76

19

75

USD/JPY Daily

USD/JPY Daily Chart

Chart - Created Using Trading View

  • Despite the mixed market reaction to the NFP report, the break of the of the February high (114.96) accompanied by the recent series of higher highs & lows keeps the near-term bias tilted to the topside especially as the Federal Open Market Committee (FOMC) is widely expected to raise the benchmark interest rate by 25bp on March 15; however, failure to close above the 115.10 (50% retracement) hurdle may undermine the recent advance in the exchange rate, with the pair at risk of facing range-bound conditions as market participants attempt to gauge the future pace of the Fed’s normalization cycle.
  • Even though Fed Fund Futures still price a 90% probability for a March rate-hike, the dollar stands at risk of facing a knee-jerk reaction as market attention turns to the slew of fresh estimates; the FOMC appears to be on course to further normalize monetary policy in 2017, but officials may curb expectations for a series of rate-hikes as Chair Janet Yellen warns ‘inflation moved up over the past year, mainly because of the diminishing effects of the earlier declines in energy prices and import prices.’
  • The committee may attempt to buy more time as ‘market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance,’ and the greenback may struggle to hold its ground should central bank officials highlight a further reduction in the longer-run interest rate forecast.
  • Nevertheless, the Bank of Japan (BoJ) may keep the door open to further embark on its easing-cycle as the central bank struggles to achieve the 2% target for inflation, but Governor Haruhiko Kuroda and Co. appear to be in no rush to adjust its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control as ‘there is not much likelihood that we will further lower the negative rate; more of the same rhetoric may spark a limited market reaction as the central bank sticks to the sidelines.
  • Lack of momentum to close above 115.10 (50% retracement) may produce a similar reaction from earlier this year, with dollar-yen at risk of tracking the near-term range as the pair remains capped by the Fibonacci overlap around 116.00 (38.2% retracement) to 116.10 (78.6% expansion); first downside region of interest coming in around 114.00 (23.6% retracement) to 114.30 (23.6% retracement) followed by 113.10 (78.6% retracement).

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--- Written by David Song, Currency Analyst

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