Photo by Michelle Spollen on Unsplash
 

What makes the USD/CAD our currency pair of the week is the upcoming policy decisions from the Bank of Canada this week and the Federal Reserve next week, as well as key data releases such as the Canadian jobs report this Friday and US CPI next Tuesday. In addition, we have had yet another spike in oil prices, following Saudi’s decision to go it alone this time in cutting its production by a significant 1 million barrels per day in July, while all other OPEC+ members agreed to extend the earlier cuts through the end of 2024. If oil prices maintain their gains, then this should keep the CAD supported, all else being equal. The immediate focus will be on the ISM Services PMI, following a strong (or maybe not that strong) US jobs report on Friday, which will keep the dollar in focus.
 

Key data for USD/CAD this week

Here are the key data highlights to watch for the USD/CAD this week.

Follow this link for the economic calendar in full.
 

Can the US dollar hold its gains after the strange jobs report?

The big question is whether the Fed will hike or not in June, which in turn raises questions as to whether the US dollar’s rally will hold.

Friday’s mixed jobs report means markets have not been convinced fully to price in more than a 50% probability of a June hike. While the headline nonfarm payrolls number suggests all is well in the economy with the addition of a very strong 339K jobs, the rise in the unemployment rate to 3.7% from 3.5% completely contradicts the jobs (different surveys producing contrasting results). In fact, markets are now attaching a June hike just shy of a 25% chance, down slightly from Friday.

With the FOMC already entering the black-out period, and just a couple of important data pointers to watch between now and the June 14 meeting, there won’t be many catalysts to fuel the dollar rally directly. Investors will probably have a much better idea once the inflation report is published on June 13th, a day ahead of the FOMC rate decision. The immediate focus will be on the ISM services PMI, due for release later on Monday. Apart from these events, any strength or weakness for the greenback in the interim will come from foreign currencies.

What’s more, sentiment in stock markets improved further last week with S&P racing to fresh yearly highs, after the debt-ceiling saga ended with Biden signing the bill into law on Saturday. The dollar’s haven demand has therefore fallen.

All told I think the dollar's bullish momentum may fade as we head into the FOMC meeting next week. Some pro-cyclical currencies could outperform such as the AUD and CAD, with rate decisions to come from both the RBA and BOC this week. At the time of writing, the Dollar Index was trading around 104.35, extending its bounce from Friday.
 

We expect a hawkish BOC

At Wednesday’s meeting, I am doubtful the BOC will deliver a hike as it will want to await more data to support the case for tightening. The BOC lifted rates to the current 4.5% at its January 25 meeting and has since sat pat for the next two meetings in March and April. But improving Canadian data suggests the central bank could provide an additional 25 bps in the upcoming months. It will perhaps wait to see what the Fed does first, before potentially hiking again.

Recent data out of Canada suggests the North American nation is holding its own rather well. First quarter GDP, for example, was stronger than expected, suggesting the economy has maintained a lot of momentum. What’s more, recent inflation reports have revealed a steady rise in core goods prices while we have also seen an unexpected surge in shelter prices. In terms of employment, well there are not many concerns here. In recent months, we have also seen above-forecast jobs data, with the headline employment change beating expectations in every single of the past 8 months. The May jobs report will be published on Friday, a couple of days after the rate decision.

If Canadian data continues to point towards an economy remains hot, then this should increase the odds of an additional 25 bps hike from the Bank of Canada in the upcoming month. At its next meeting on Wednesday, though, I am doubtful the BoC will deliver a hike as it will want to await more data to support the case for a hike. The BoC lifted rates to the current 4.5% at its January 25 meeting and has since sat pat for the next two meetings in March and April.
 

USD/CAD outlook: Technical Analysis

The breakout above the trend line couldn’t hold last week, which means we now have a failed breakout scenario on the USD/CAD. This implies that the USD/CAD is most likely heading to levels where trapped traders’ stops would be resting. One of those levels was below 1.3500, the base of the previous breakout that ultimately failed. This area has now been cleared. The bigger liquidity pools are likely to be below 1.33 and 1.32, given the multi-month higher lows that have been created between these levels.

Previous support levels such as 1.3450, 1.3500 or 1.3550 could turn into resistance. Among these levels, 1.3500 is perhaps the most important one, as we have the 200-day average and the underside of the broken trend line also converging there.

On the flip side, this bearish technical setup will become weak should rates go on to climb back above 1.3550 resistance in the coming days. And a potential move above last week’s high and next resistance at 1.3650 would mark a significant turning point, as that would completely invalidate the bearish setup.

(Click on image to enlarge)

Source: TradingView.com

More By This Author: