In the last week, there has been a sea change in sentiment among currency traders. Where the US had been seen as the only hawkish central bank, in recent days, the Bank of Canada, Bank of England and ECB have all hinted they could join the Fed in reducing stimulus.

The Bank of Canada has been the most vocal of the three, hinting it could be ready to raise interest rates this month. CAD has been rallying against USD in recent weeks and with a number of key economic reports due for the US and Canada this week, USD/CAD could be particularly active as traders evaluate the monetary policy outlook on both sides of the border.

Technicals

For most of the last year, USD had been outperforming CAD as shown by how USD/CAD advanced in a rising channel. Since peaking near $1.3800 in the beginning of May, however, the tide has been turning back in favour of CAD. The RSI broke 50 back in May signalling a downturn for the pair and has remained below that level indicating ongoing distribution

Last week, the pair broke uptrend support near $1.3200 signalling the start of a new downtrend that has been confirmed by the pair breaking $1.3000. RSI is getting oversold so a pause or trading bounce is possible in the short term, but the bigger signals indicate a more substantial trend change is underway.

Initial resistance on a bounce may appear near $1.3045 with next downside support near $1.2800.

Oversold conditions and holidays in the US and Canada this week mean that we could see a bigger reaction than usual to any market moving news that may appear.

Fundamentals

The US dollar has had the upper hand over the Canadian dollar for the last several years, first driven by the collapse in the oil price, then by the Fed being relatively more hawkish than the Bank of Canada.

With crude oil stabilizing above $40.00, the Bank of Canada believes that the Canadian economy has adjusted to reflect the current oil price environment and that the emergency stimulus of 2015 (two rate cuts from 1.00% to 0.50%) has run its course.

Meanwhile in the US, after hiking interest rates three quarters in a row, the Fed could be on hold until later in the year as it may not be able to make a move in September due to the prospects of a US government shutdown with a debt ceiling and budget battle looming.

Trade between the US and Canada may also move into the spotlight this week with a number of issues still unresolved including softwood lumber, dairy and aerospace unresolved. With a G20 summit starting 7 July and NAFTA renegotiations starting in August, President Trump may again focus on the trade file.

While there are holidays on both sides of the border, it’s still a busy week for potentially market moving news. There are a number of economic reports out this week giving traders a chance to compare the relative economic performance of the US and Canada including Manufacturing PMI Monday and Tuesday, trade balances Thursday and employment on Friday.   

 

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