Canadian Dollar Forecast: The Stars Align for More USD/CAD Strength
USD/CAD WEEKLY FORECAST: BULLISH
- Strong labor market recovery in the United States could bring forward the Fed’s QE exit strategy announcement, pushing both U.S. treasury yields and the greenback higher
- USD/CAD is likely to remain supported in the short term on tapering speculation
- In this article we present the most important USD/CAD technical levels to watch out for in the coming week
The near-term outlook for USD/CAD has improved of late. Remarkable strength in the US labor market despite renewed COVID-19 risks, reflected in the July employment results, will likely lead the Fed to "drop strong hints" at the Jackson Hole Symposium that the economy is on track to meet the "substantial further progress" criteria for withdrawing stimulus in the coming months. As a consequence, traders may start positioning for the possibility of a "quantitative easing exit strategy announcement" at the September FOMC meeting, an outcome that will push U.S. Treasury yields higher and support the greenback.
With tapering speculation running high, USD/CAD could be in a good spot to reassert bullish momentum, especially after Canadian employment data disappointed expectations. As a reminder, the Canada’s economy added 94,000 jobs in July, well below expectations of a 165,000 increase. Needless to say, the cooling labor market in that country may undermine plans to scale back stimulus, prompting the central bank (BoC) to adopt a more neutral stance. Against this backdrop, USD/CAD’s price action may start drifting higher in the upcoming days as traders cut some long exposure to the Canadian dollar.
From a technical point of view, USD/CAD failed to pierce support near 1.2475, was rejected from those levels and subsequently staged a large bounce ahead of the weekend as buyers seized control of the market. As long as prices remain above the rising trendline shown on the chart with a yellow line, the short-term bias is positive. However, to have more conviction in the bullish argument, the pair will have to rise decisively above the 200-day moving average near 1.2590. Should this scenario play out, we could see a rally towards resistance near 1.2650 as bulls gain the upper hand. A daily close above this technical barrier would facilitate the journey to the July high at 1.2807.
On the contrary, if USD/CAD unexpectedly pulls back, the first support appears at 1.2475 (trendline mentioned above). A move below this area could attract sellers and rejuvenate downside pressure, triggering a drop to 1.2405, a floor created by the 50% Fibonacci retracement of the June/July rally.
USD/CAD TECHNICAL CHART
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---Written by Diego Colman, DailyFX Market Strategist
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.