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CAD Risks Larger Correction as BoC Tames Bets for Imminent Rate-Hike

CAD Risks Larger Correction as BoC Tames Bets for Imminent Rate-Hike

David Song, Strategist

Talking Points:

- NZD/USD Bullish Sequence Stalls Ahead of New Zealand 3Q CPI Report.

- USD/CAD Risks Larger Correction as BoC Tames Bets for Imminent Rate-Hike.

- DailyFX 4Q 2017 Forecasts Are Now Available!

DailyFX TableNZD/USD

NZD/USD struggles to extend the bullish sequence from the previous week, with the pair at risk of giving back the rebound from the monthly-low (0.7056) should New Zealand’s 3Q Consumer Price Index (CPI) fail to boost interest-rate expectations.

Even though the headline reading for inflation is projected to uptick to an annualized 1.8% during the three-months through September, the print may do little to alter the monetary policy outlook as it continues to run below RBNZ’s 2% target midpoint. As a result, acting Governor Grant Spencer may largely endorse a wait-and-see approach at the last 2017-meeting on November 9 as ‘headline inflation is likely to decline in coming quarters, reflecting volatility in tradables inflation.

NZD/USD Daily Chart

NZD/USD Daily Chart
  • NZD/USD stands at a key juncture as it appears to be making another run at the Fibonacci overlap around 0.7190 (50% retracement) to 0.7200 (38.2% retracement), while the Relative Strength Index (RSI) comes up against trendline resistance.
  • However, the near-term rebound may unravel amid the lack of momentum to extend the recent series of higher highs & lows, with the first downside target coming in around 0.7100 (38.2% retracement) to 0.7110 (38.2% expansion) followed by the former-resistance zone around 0.7040 (50% retracement).
USD/CAD

The Canadian dollar struggles to hold its ground against its U.S. counterpart, with USD/CAD at risk of facing a more material correction as the Bank of Canada (BoC) softens its hawkish tone and expects ‘a moderation of growth in the second half of the year.’

With Canada approaching full capacity, it seems as though Governor Stephen Poloz and Co. will carry the current policy into 2018 as the central bank expects the real economy to ‘slows down to its sustainable level.’ In turn, the BoC may merely attempt to buy more time at the next meeting on December 6 as ‘future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation.

Nevertheless, the push by Prime Minister Justin Trudeau’s government to reduce the small-businesses tax rate may keep the BoC on track to implement higher borrowing-costs as officials note ‘there was a good uptick in investment intentions and willingness to hire,’ and the broader shift in USD/CAD behavior may continue to take shape in the year ahead as the pickup in economic activity becomes ‘more broadly-based and self-sustaining.

USD/CAD Daily Chart

USD/CAD Daily Chart

Chart - Created Using Trading View

  • Keep in mind, USD/CAD has broken the monthly opening range, with the pair at risk of facing range-bound conditions as it snaps the bullish formation carried over from the previous month.
  • The failed attempt to close below the 1.2440 (23.6% expansion) region may spur another run at the 1.2620 (50% retracement) hurdle especially as it initiates a fresh series of higher highs & lows.
  • Next topside target comes in around 1.2770 (38.2% expansion) to 1.2830 (38.2% retracement), which largely lines up with the August-high (1.2778).

Retail Sentiment

Retail Sentiment

Track Retail Sentiment with the New Gauge Developed by DailyFX Based on Trader Positioning

  • Retail trader data shows 53.0% of traders are net-long NZD/USD with the ratio of traders long to short at 1.13 to 1. In fact, traders have remained net-long since October 06 when NZD/USD traded near 0.70889; price has moved 1.3% higher since then. The number of traders net-long is 16.2% higher than yesterday and 3.6% higher from last week, while the number of traders net-short is 18.7% higher than yesterday and 1.7% lower from last week.
  • Retail trader data shows 48.3% of traders are net-long USD/CAD with the ratio of traders short to long at 1.07 to 1. The number of traders net-long is 4.4% higher than yesterday and 9.7% lower from last week, while the number of traders net-short is 4.2% lower than yesterday and 45.7% higher from last week.
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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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

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