Thu, Mar 23, 2023 @ 12:24 GMT
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Currency Pair of the Week: USD/CAD

The USD/CAD is going to face a testing week. We have a rate decision from the Bank of Canada in mid-week, followed by monthly jobs reports from both North American nations on Friday, in addition to a handful of other second tier data that will be released throughout the week. Fed Chair Powell will also testify this week. Ahead of all of these macro events, the USD/CAD remains in consolidation within an overall bullish trend, with investors showing preference to US dollar in recent weeks across the board, owing to hawkish FedSpeak amid strength in data from the world’s largest economy. We think there’s a good chance rates will stage a breakout above 1.3700 this week.

USD/CAD poised for breakout?

Before discussing the macro events, let’s a have a quick look at the USD/CAD’s daily chart:

Source: StoneX and TradingView

Following the breakout above 1.35 handle a couple of weeks ago, the USD/CAD has been stuck in consolidation. But with rates being somewhat comfortably above the still-rising 200-day average and 21-day exponential average, the path of least resistance is objectively to the upside.

We will thus maintain a technical bullish view on this pair for as long as it holds support in the shaded region on the chart, between 1.3470 to 1.3580. We think the probability of an upside breakout is greater than a downside move from this area, owing to favourable macro factors.

However, we are a bit cautious in our view as the recent improvement in risk appetite might discourage the dollar bulls from opening significant long positions in the greenback.

What has kept USD/CAD supported?

The USD/CAD has been on the ascendency because investors are expecting the Fed to hike rates further and keep its monetary policy in contractionary mode longer than previously expected. This is all because incoming data has shown that price and wage inflation have been sticky, while employment has remained very strong. So, it has been more of a US dollar story than a Canadian dollar one. That said, the latter hasn’t exactly been falling off a cliff. It has been helped in part by mild ‘risk-on’ trade, keeping the downside limited for commodity dollars across the board. But expectations that the Bank of Canada is going to pause its rate hikes is what really has provided support on the dips.

Key events for USD/CAD this week

The table below shows some of the key events that could impact the direction of the USD/CAD pair (we have highlighted the most important):

Date Time (GMT) Currency Forecast Previous
Mon Mar 6 3:00pm CAD Ivey PMI 55.9 60.1
Tue Mar 7 3:00pm USD Fed Chair Powell Testifies
Wed Mar 8 1:15pm USD ADP Non-Farm Employment Change 195K 106K
3:00pm CAD BOC Rate Statement
CAD Overnight Rate 4.50% 4.50%
USD Fed Chair Powell Testifies
USD JOLTS Job Openings 10.61M 11.01M
6:01pm USD 10-y Bond Auction 3.61|2.7
Thu Mar 9 1:30pm USD Unemployment Claims 195K 190K
Fri Mar 10 1:30pm CAD Employment Change 6.0K 150.0K
CAD Unemployment Rate 5.1% 5.0%
USD Average Hourly Earnings m/m 0.3% 0.3%
USD Non-Farm Employment Change 206K 517K
USD Unemployment Rate 3.4% 3.4%


Without a doubt, the top two most important events from the above are:

BOC rate decision (Wednesday) 

The BoC is not expected to hike rates further after a total of 425 basis points worth of interest rate rises. The central bank signalled at its previous meeting that it would pause to digest the impact of the last tightening. We have seen weakening growth, and slowdown in inflation, although job creation has been above forecast. Will we see another strong showing from the jobs market on Friday? Ahead of that is the BoC decision on Wednesday. If the central bank stays pat on rate hikes, then this could pave the way for more gains for the USD/CAD, especially if Governor Tiff Macklem opts for a less hawkish language in the policy statement.

US non-farm payrolls (Friday)

The resilience of the US labour market in the face of rate hikes and high inflation has kept the Fed on a hawkish mode, which helped to keep the dollar supported last month. Will we see further evidence of a tight labour market? If so, this should help support the dollar further, and keep the USD/CAD on a hawkish path.

— Written by Fawad Razaqzada, Market Analyst
DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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