Sat, Mar 25, 2023 @ 10:46 GMT
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Currency Pair of the Week: USD/CAD

On Wednesday, the Bank of Canada meets and US Fed Chairman Powell testifies in front of Congress. This could add some volatility to the pair!

This week, US Fed Chairman Powell will give his semiannual testimony on the economy to Congress. At the January FOMC meeting, Powell said he sees the risk of inflation staying higher for longer than expected. In addition, he said that there is quite a bit of room to raise rates without dampening employment. He added that the Committee was of a mind to raise rates at the March meeting. Since then, St Louis Fed President Bullard has been the most vocal member of the Committee. Bullard says that he sees 100bps of increases in interest rates by July 1st. This would imply either an increase by 50bps at one of the meetings prior to then, or an inter-meeting hike. In addition, the Fed’s favorite measure of inflation was released last week for January, Core PCE. The key inflation print was 5.2% YoY vs an expectation of 5% YoY and a previous print of 4.9% YoY. Also, this week the US will release Nonfarm Payrolls. Expectations are for an increase of 438,000 jobs in February after a January print of 467,000. Will the high inflation data and the high expectation for payrolls cause Powell to be extremely hawkish? Or will he downplay the data due to the ongoing events in the Russia/Ukraine conflict?

The Bank of Canada meets on Wednesday this week. At the last meeting, the Committee surprised markets by not hiking and leaving rates at a record low of 0.25%. However, they did remove the forward guidance to hold rates at the lower bound, given that economic slack has been absorbed. In addition, Canada’s January CPI was 5.1% YoY vs and expectation of 4.8% YoY and a previous reading of 4.8% YoY. Many economists are expecting at 25bps hike; however, markets are pricing in a 70% chance of a 50bps hike. Again, traders must consider the situation in Ukraine right now. Will the Committee hike 50bps or will they refer to the Russia/Ukraine uncertainty and only hike 25bps? Traders will also be watching for the timing of when the BOC will begin to let its balance sheet roll off.

On a daily timeframe, USD/CAD failed to reach the target of a head and shoulders pattern in early January and bounced. During the month of February, the pair traded in a tight range between 1.2636 and 1.2797. With the flight to safety into the US Dollar upon the Russian invasion into Ukraine, there was a short-lived move above the range to 1.2878, however, price quickly reversed and moved back into the sideways channel.

Source: Tradingview, Stone X

On a 240-minute chart, USD/CAD has room to move back to the bottom of the range near 1.2636. Also notice that additional support arrives near the same level at 1.2629, which is the 127.2% Fibonacci retracement from the lows of February 23rd to the highs of February 24th. Below there, support is at the long-term horizontal support and the 161.8% Fibonacci extension from the same timeframe between 1.2561 and 1.2570. First resistance is at Monday’s high of 1.2891, then the highs from February 24th at 1.2878. Long-term resistance comes into play at 1.2964.

Source: Tradingview, Stone X

USD/CAD has been trading in a tight range for most of the last month. However, on Wednesday the Bank of Canada meets and US Fed Chairman Powell testifies in front of Congress. These events may offer the opportunity for the pair to move out of the range and provide some long awaited price volatility!
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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