Tue, Dec 06, 2022 @ 23:35 GMT
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Currency Pair of the Week: USD/CAD

The biggest driver of the US Dollar this week will be the FOMC interest rate decision on Wednesday.  The committee is expected to leave interest rates on hold; however the key to watch will be for guidance as to how they see inflation in the near term.  The December headline print was 7.0% YoY, the highest level in 40 years.

And don’t forget about jobs!  Over the last 2 months, the NFP prints have averaged only +224,000.  It will be interesting to see if the Fed still sees “maximum employment” in the jobs market.  Most of the juicy content from this meeting should be in the press conference which follows from Fed Chairman Jerome Powell.  With the NASDAQ 100 down over 10% from its peak and other indices close behind, one has to consider that Powell may try and walk back some of the hawkishness that the markets are pricing in, as far as rate hikes and balance sheet reductions are concerned.  Markets are currently pricing in 4 rate hikes for 2022, according to the CME’s Fedwatch tool.  In addition, markets are pricing in an 85% chance of a rate hike at the March meeting.  Recall that the Fed’s bond buying program is expected to end in March as well.   Earnings will also affect markets this week, as one-third of the S&P 500 report.

The Bank of Canada also meets this week on Wednesday.  Expectations are mixed as to whether the BOC will hike rates after record low pandemic levels of 0.25%.  Recall that the BOC ended their bond buying program in October 2021.  Are they ready to hike rates?  Inflation seems to be leveling off as the December print moved marginally from 4.7% to 4.8%.  However, this is the highest level since September 1991.  Canadian jobs have been stellar over the last few months.  After beating expectations with a whopping +153,700 employment change in November, Canada followed that up by beating expectations again in December with +54,000 new jobs.  No worries on the job front! It’s going to be a close call on the decision for this interest rate meeting.   Something else that needs to be watched: the price of crude oil.  The Canadian Dollar and oil prices move together. Therefore, if oil prices continue to move higher, watch for the price of USD/CAD to move lower.

On the daily chart below, the correlation coefficient between USD/CAD and WTI Crude Oil Futures is -0.85.  Any reading below -0.80 is considered to be a strong negative correlation.  With Crude Oil prices down nearly 2.50% on Monday, it’s not a surprise that USD/CAD bounced.

Source: Tradingview, Stone X

USD/CAD had been moving lower and after breaking the neckline of a head and shoulders pattern near 1.2600, the pair appeared on its way towards the target of near 1.2250.  However, USD/CAD ran into support at the 200 Day Moving Average near 1.2500, where it oscillated around for 8 trading sessions. Last Friday, the pair began moving higher towards the neckline.  With the intra-day move of over 120 pips towards the 50 Day Moving Average resistance of 1.2704, traders need to question whether the head and shoulders pattern in invalidated.  The general rule is that the pattern is invalidated when price closes above the neckline.  Some people give a limit as to how far it goes or they put a time limit on it.

On a 240-minute timeframe, price is approaching the 50% retracement level from the highs of December 20th 2021 to the lows January 19th, also near the 1.2707 level.

Source: Tradingview, Stone X

Due to the horizontal resistance and the 50 Day Moving Average on the daily timeframe, along with the 50% retracement on the 240-minute timeframe, I would consider the head and shoulders pattern invalidated with a close above 1.2710 on the daily timeframe.  Anything below that could form a “Double Shoulder”, and proceed lower again.  Resistance above the 1.2700/1.2710 confluence is at the 61.8% Fibonacci retracement level from the same timeframe and horizontal resistance near 1.2767, then previous highs at 1.2814. Notice however, that the RSI is in overbought territory, indicating the possibility of a reversal.  Support is at the neckline of the Head and Shoulders pattern near 1.2600, previous highs at 1.2750, and the January 19th lows at 1.2450.

With both the FOMC and the BOC meetings on Wednesday, USD/CAD could remain volatile this week.   And with the high negative correlation to crude oil, if WTI continues to be volatile, so should USD/CAD.  Watch the technical as well!

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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