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USD/CAD Weakness to Persist as Bearish Series Takes Shape

USD/CAD Weakness to Persist as Bearish Series Takes Shape

2018-05-31 16:00:00
David Song, Currency Strategist
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CANADIAN DOLLAR TALKING POINTS

The Canadian dollar is back under pressure as updates to the Gross Domestic Product (GDP) report dampen the outlook for growth, and USD/CAD stands at risk of facing range bound prices over the remainder of the week as market participants mull the timing of the next Bank of Canada (BoC) rate-hike. Nevertheless, recent price action suggests the weakness will persist as USD/CAD initiates a fresh series of lower highs & lows, with the pair now at for a larger correction as the BoC alters the outlook for monetary policy.

Image of daily change for major currencies

USD/CAD Weakness to Persist as Bearish Series Takes Shape

Image of daily change for USDCADImage of Canda GDP

The 1.3% expansion in Canada’s growth rate may keep the BoC on the sidelines at the next meeting on July 11 as the figure falls short of expectations, and the central bank may continue to endorse a wait-and-see approach for monetary policy as officials pledge to ‘to assess the economy’s sensitivity to interest rate movements and the evolution of economic capacity.

Keep in mind, the fresh projections from Governor Stephen Poloz and Co. may fuel speculation for another rate-hike in 2018 as ‘higher interest rates will be warranted to keep inflation near target,’ and the BoC may sounds more hawkish in the second-half of the year as ‘inflation in Canada has been close to the 2 per cent target and will likely be a bit higher in the near term than forecast in April.’

In turn, the recent shift in central bank rhetoric may continue to boost the appeal of the Canadian dollar, with USD/CAD now at risk of giving back the advance from the previous month amid the failed attempt to test the 2018-high (1.3125).

USD/CAD Daily Chart

Image of USDCAD daily chart
  • Near-term outlook for USD/CAD remains capped by the Fibonacci overlap around 1.2980 (61.8% retracement) to 1.3030 (50% expansion), with the pair at risk for a larger correction especially as it initiates a fresh series of lower highs & lows, while the Relative Strength Index (RSI) continues to track the bearish formation from earlier this year.
  • Need a break/close below 1.2830 (38.2% retracement) to open up the Fibonacci overlap around 1.2720 (38.2% retracement) to 1.2770 (38.2% expansion).
  • Next region of interest comes in around 1.2620 (50% retracement) followed by the overlap around 1.2440 (23.6% expansion) to 1.2510 (78.6% retracement), which sits just beneath the April-low (1.2527).

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

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

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