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USD/CAD Initiates Bearish Sequence Despite Hawkish Fed Rhetoric

USD/CAD Initiates Bearish Sequence Despite Hawkish Fed Rhetoric

2018-04-04 02:30:00
David Song, Currency Strategist
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FX TALKING POINTS:

- USD/CAD Initiates Bearish Sequence Despite Hawkish Fed Rhetoric. Canada Employment Report in Focus.

- AUD/USD Holds Narrow Range as Reserve Bank of Australia (RBA) Endorses Wait-and-See Approach. Relative Strength Index (RSI) Sits at Trendline Resistance.

DailyFX Table

USD/CAD INITIATES BEARISH SEQUENCE DESPITE HAWKISH FED RHETORIC. CANADA EMPLOYMENT REPORT IN FOCUS.

USDCAD Table

USD/CAD initiates a fresh series of lower highs & lows even as Federal Reserve officials strike a hawkish outlook for monetary policy, and the rebound from the February-low (1.2247) may continue to unravel amid the failed attempts to break/close above the 1.3130 (61.8% retracement) region.

Fresh comments from Fed Governor Lael Brainard suggest the Federal Open Market Committee (FOMC) will continue to implement higher borrowing-costs over the coming months as unemployment ‘could reach levels not seen in several decades,’ and a growing number of central bank officials may project a neutral Fed Funds rate beyond the 2.75% to 3.00% threshold as ‘the recently enacted fiscal stimulus should boost the economy at a time when it is close to full employment and growing above trend.’ Speculation for an extended hiking-cycle may heighten the appeal of the greenback especially as the Bank of Canada (BoC) remains in no rush to further normalize policy, with USD/CAD at risk of exhibiting a more bullish behavior over the coming months as Governor Stephen Poloz and Co. stick to a wait-and-see approach for monetary policy.

However, another 20.0K expansion in Canada Employment may push the BoC to implement a rate-hike sooner rather than later, and the central bank may strike a more upbeat tone at the next meeting on April 18 should the data prints coming out of the Canadian economy highlight an improved outlook for growth and inflation.

For more in-depth analysis, check out the Q2 Forecast for USD/CAD

USD/CAD DAILY CHART

USD/CAD Daily Chart
  • USD/CAD stands at risk for a larger pullback as it snaps the narrow range from the previous week, with a break/close below the 1.2720 (38.2% retracement) to 1.2770 (38.2% expansion) region bringing the downside targets back on the radar.
  • At the same time, the Relative Strength Index (RSI) appears to be exhibiting a similar dynamic as the oscillator continues to fall back from overbought territory and starts to carve a bearish trend.
  • Next downside hurdle comes in around 1.2620 (50% retracement) followed by the Fibonacci overlap around 1.2440 (23.6% expansion) to 1.2510 (78.6% retracement).

AUD/USD HOLDS NARROW RANGE AS RESERVE BANK OF AUSTRALIA (RBA) ENDORSES WAIT-AND-SEE APPROACH.

AUDUSD Table

AUD/USD appears to be stuck in a narrow range as the Reserve Bank of Australia (RBA) endorses a wait-and-see approach for monetary policy, and the recent rebound in the exchange rate may continue to unravel as the central bank tames expectations for a rate-hike in 2018.

Even though the ‘central forecast remains for faster growth in 2018,’ the RBA appears to be in no rush to normalize monetary policy as Governor Philip Lowe & Co. reiterate that ‘inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing.’ The recent remarks suggest the central bank will stick to the sidelines throughout the first-half of the year as ‘household income has been growing slowly and debt levels are high,’ and the Australian dollar stands at risk of extending the decline from earlier this year as the Federal Reserve appears to be on track to implement higher borrowing-costs over the coming months.

Keep in mind, the monthly opening range remains in focus as AUD/USD hovers above the 2018-low (0.7643), with the pair at risk of facing a larger correction as the bearish momentum appears to be abating.

AUD/USD DAILY CHART

AUD/USD Daily Chart
  • The string of failed attempts to break/close below the 0.7650 (38.2% retracement) region raises the risk for larger rebound in AUD/USD, with a break/close above the 0.7720 (23.6% retracement) to 0.7770 (61.8% expansion) opening up the topside targets.
  • Keeping a close eye on the Relative Strength Index (RSI) as the indicator comes up against trendline resistance and is on the cusp of flashing a bullish trigger; however, failure to break the downward trend may keep AUD/USD under pressure, with a break/close below the 0.7650 (38.2% retracement) raising the risk for a move back to 0.7590 (100% expansion).
  • Next downside region of interest comes in around 0.7460 (23.6% retracement) to 0.7530 (38.2% expansion), which lines up with December-low (0.7501).

For more in-depth analysis, check out the Q2 Forecast for AUD/USD

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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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