USD / CAD weekly forecast: discounting the Fed is risky

  • USD / CAD closes at a four week high on Friday.
  • Wednesday’s Federal Reserve meeting is focused on the market.
  • Close The Canadian federal elections are expected to produce no change in policy.
  • The FXStreet forecast poll predicts that the USD / CAD will drop below 1.2700 this week.

USD / CAD is back to its best in a month as markets anticipate the Federal Reserve will confirm that a bond cut is expected this year and that the closing of the Canadian election is unlikely to result in a major policy change , whatever its political outcome.

The Canadian dollar closed at 1.2763, its best level since August 19. The USD / CAD has seen a steady but uneven rise since it hit its early June low at 1.2029.

The loonie’s decline came despite a 3.4% gain in West Texas Intermediate (WTI) which ended at $ 71.79, its highest level since July 30.

US Treasury rates rose, with the 10-year yield adding a modest 4 basis points but matching the highest yield since July 14.

10-year Treasury yield


Last meeting in the third quarter on Wednesday, the Federal Open Market Committee (FOMC), the US central bank’s policy board, will likely give a second approval to cut its promised bond buying program, without specify start date or amount. Non-farm wages in August, which missed consensus forecasts by more than half a million, should make governors cautious, even as they followed two months with a million new jobs each.

At the Fed Symposium in late August in Jackson Hole, Wyoming, President Jerome Powell noted that there was a very good chance that the cut in the bond program, the long-awaited cut, would begin before the end of the year. year. There are two more Fed meetings this year, November 2 and December 15, and there is no rush to enact the details of a policy change that will, for all practical purposes, not take place until 2022. .

This promise of higher US interest rates has been the mainstay of the US dollar over the past month.

Canadian inflation was slightly higher than expected in August, although the Bank of Canada’s key rate was a little lower than expected, although it increased in July.

In the United States, the Consumer Price Index for August showed the first indication that price increases may be slowing. Retail sales in August rebounded intelligently from their decline the month before.

Polls for Monday’s Canadian federal election between Prime Minister Justin Trudeau’s Liberals and Erin O’Toole’s Conservatives show that neither party won an absolute majority of Parliament’s 338 seats.

Either party will likely have to organize a coalition to govern. The Conservatives would seek help from the Bloc Québécois in Quebec and the Liberals would court the left-wing New Democrats. In the previous election, the Conservatives won the popular vote, but due to the split, the Liberals ended up with more seats. In the current Parliament, the Liberals have 155 seats, the Conservatives 119, the Bloc Québécois 32 and the left-wing New Democrats 24.

USD / CAD outlook

Markets ignore Canadian elections. The evolution of Fed policy is far more important to US and Canadian dollars than to who resides at 24 Sussex, the official residence of the Prime Minister.

Mr. Powell has already set the policy for the remainder of the year. The Fed will reduce its bond purchases, all that’s missing is the date and timetable for implementation. This expectation is at the origin of the recent rise of the greenback.

Unless Mr. Powell goes back on that promise, only the details of the type, whether it’s this FOMC or the next two, matter. The rates on US Treasuries will go up and they will take the greenback with them, the markets are waiting for the signal.

The third round of the Fed’s economic forecast for this year is also due on Wednesday. The projections for GDP, inflation and federal funds are indicative of the Fed’s thinking. The June projection materials were stronger in all three estimates. Any change here, higher or lower, will have an immediate impact on the market, with the improvement tending to support the US currency.

The Federal Reserve should maintain its policy stance that a reduction in bond purchases and therefore higher US interest rates are coming. This nascent change gives the USD / CAD a pronounced bullish bias.

The economic data of the two countries, even a national election in Canada, except as regards the policy of the Fed, is less important than the decision of the American central bank.

Statistics of Canada September 13-September 17


US statistics September 13-September 17


Statistics of Canada September 20-September 24


US statistics September 20-September 24

USD / CAD technical outlook

The upward channel that started with the June low at 1.2029 remains the dominant pattern. Buying advice is evident in momentum indicators. The MACD (Moving Average Convergence Divergence) turned positive two weeks ago and has maintained its buy signal despite the highs and lows of the daily movement. The Relative Strength Index (RSI) hit its highest level in a month and True Range saw a substantial increase this week.

The 21-day moving average (MA) at 1.2644 and the 50-day MA at 1.2598 are the most active support. If the 50-day MA crossed the 21-day MA, 46 points apart, that would be a strong signal to the upside.

Resistance: 1.2830, 1.2870, 1.2930, 1.2892 (38.2 Fibonacci)

Support: 1.2690, 1.2644 (21 MA) 1.2640, 1.2619 (23.6 Fibonacci), 1.2600 1.2598 (50 MA), 1.2540, 1.2500

FXStreet Forecast Survey

The technical pessimism of the FXStreet Forecast poll will likely be overtaken by the impending fundamental shift in US monetary policy.

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