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USD/CAD Rate Forecast: CAD Strength on USD Weakness May Be Temporary

USD/CAD Rate Forecast: CAD Strength on USD Weakness May Be Temporary

2018-07-03 19:30:00
Tyler Yell, CMT, Currency Strategist
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Canadian Dollar Rate Forecast Key Takeaways:

  • The ONE Thing: Canadian Dollar strengthens after China notes that Yuan will notbe used as a weapon in trade wars and Markit Canada Manufacturing for June increasing to 57.1 from 56.2 last month.
  • The widening yield spread between US and CA 2-year sovereigns has narrowed in recent sessions as Poloz introduced two-way risk into the market by noting that the July 11 meeting is live for a rate hike causing markets to price in an 84% probability of a 25bp Bank of Canada hike.
  • Technical Outlook: USD/CAD found resistance at the 1.3386 level that aligns with the 76.4% retracement of the 2017 range. Support is currently at 1.3100, which aligns with the March high. A hold of 1.3100 and subsequent breakout should be the focus if the BoC isn’t able to appease the bulls with their rate announcement post-conference.

Key Technical Levels for Canadian Dollar Rate to US Dollar:

  • Resistance: C$1.3386 June 27 high (lowest level for CAD to USD in 12-months, 76.4% Fibo of May 2017 high)
  • Spot: C$1.3144
  • Support: C$1.3067 June 5 high

Lower Highs on USD/CAD Turns Focus to Double-Top Target C$1.3265

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Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

Our last piece discussed the potential for short-term C$ strength on the back of a likely short-term double-top, which is shown on the chart above. The double-top target of C$1.3143 has acted as support on the move, and now traders should be on the lookout for an upside break.

A break above the opening range high of July at 1.3225 and the double-top neckline at 1.3265 could signal an upside resumption toward the initial double-top level of 1.3387. A break of 1.3387 would favor a move toward higher targets of 1.36/38, which would also align with the trend of a widening premium of US front-end sovereign yields relative to CA front-end yields.

US-CA 2-Year Yield Spread Makes a case for Further USDCAD Strength

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Data source: Bloomberg

USD/CAD Daily Chart: Pair tests key support at 1.3140/1.3067

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Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

The chart above shows a short-term reversal of US Dollar strength against the Canadian Dollar to open July. However, the horizontal line is drawn off the March high near 1.31, and the June 5 high at 1.3067 should curb the enthusiasm of CAD bulls.

A hold above this support point would favor a continuation of US Dollar strength as the 2-year yield premium looks set to expand further. An expansion would likely result from the Federal Reserve that is set to hike more times over the coming years than the Bank of Canada with the Bank of Canada more sensitive to Trade War and CNH outcomes than the US economy and the Federal Reserve.

More For Your Trading:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q2 have a section for each major currency, and we also offer an excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

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---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

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