CANADIAN DOLLAR TALKING POINTS

USD/CAD spiked to a fresh weekly-high as the U.S. ISM Non-Manufacturing survey beat market expectations, but key developments coming out of Canada may continue to tame the near-term advance in the exchange rate as the central bank strikes an improved outlook for the region.

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USD/CAD Outlook Mired by String of Failed Attempt to Test 2018-High

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The reaction to the ISM survey was short-lived even as the index climbed to 58.6 from 56.8 in April to exceed forecast for a 57.6 print, and USD/CAD may continue to consolidate ahead of the Federal Open Market Committee (FOMC) interest rate decision on June 13 as market participants eagerly wait for the fresh forecast coming out of the central bank.

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Bear in mind that the FOMC is widely anticipated to deliver a 25bp rate-hike next week as the ‘Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,’ but changes especially in the interest rate dot-plot may have a greater impact on the financial markets as Chairman Jerome Powell and Co. pledge to phase out the forward-guidance for monetary policy.

In turn, more of the same from the FOMC may sap the appeal of the U.S. dollar it dampens bets for four rate-hikes in 2018, and USD/CAD may struggle to retain the advance from April as the Bank of Canada (BoC) shows a greater willingness to implement higher borrowing-costs over the coming months. Subsequent to the May 30 meeting, Governor Stephen Poloz has noted that the recent developments surrounding Canada have been ‘encouraging’ despite the uncertainty surrounding the North American Free Trade Agreement (NAFTA), and the shift in the BoC’s forward-guidance may continue to tame the near-term advance in USD/CAD as the exchange rate marks anotherfailed attempt to test the 2018-high (1.3125).

USD/CAD DAILY CHART

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  • String of failed attempts to close above the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) region may pave the way for range-bound conditions in USD/CAD, but the advance from the April-low (1.2527) may continue to unravel as the Relative Strength Index (RSI) extends 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), with the next region of interest coming in around 1.2620 (50% retracement) followed by the Fibonacci overlap around 1.2440 (23.6% expansion) to 1.2510 (78.6% retracement).

For more in-depth analysis, check out theQ2 Forecast for the Euro

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.