With the Bank of Canada’s interest rate decision on Wednesday and the US non-farm payrolls on Friday, there is potential for volatility this week in USD/CAD.
Inflation will be the top priority when US President Joe Biden and Fed Chairman Jerome Powell meet on Tuesday. Last week, the Fed’s preferred inflation measure, the Core PCE, was 4.9% y/y for April versus 5.2% y/y in March. Although the print was slightly weaker than the previous month, it is still near a 40-year high. Recall that at the beginning of the month, Powell declared that the fall in inflation could come at the expense of an unemployment rate of 3.6%. Markets will know more this week when the United States releases nonfarm payrolls on Friday. It is expected that 320,000 new jobs were added to the economy in May compared to +428,000 in April. The unemployment rate is expected to fall further to 3.5% from 3.6%. The Fed will be paying close attention to this data, as it will be the last NFP data released before the Fed meets again on June 15.e.
Canada released its first quarter GDP on Tuesday. On an annualized basis, the first quarter print was 3.1% vs. 5.4% expected and 6.6% in the fourth quarter of 2021. Although this data is old, the Bank of Canada may need to take into account that the economy is not growing as quickly as previously thought when it meets on Wednesday to discuss monetary policy. Expectations are that the central bank will raise rates by 50 basis points, from 1.0% to 1.5%. The statement from the last meeting noted that interest rates will need to rise further in order to bring inflation back to the target level of 2%. Committee members also said they expected inflation to average 6% in the first half of 2022, up from 5% in January. The April CPI for Canada was 6.8% YoY vs. 6.7% YoY expected and 6.8% YoY in March. Watch for the outside chance that the BOC will surprise markets to rise 75 basis points!
USD/CAD had been trading since mid-November 2021 in a range between 1.2454 and 1.2965. May 9e, the pair eventually broke out of the top of the channel to hit a high of 1.3077 and failed. USD/CAD once again came back inside the channel and has been falling ever since. May 30ethe pair fell more than 0.5% and broke below the key support levels of the 50-day moving average, the 200-day moving average and the 61.8% Fibonacci retracement level since the most April 5 low.e at the May 12 highe near 1.2660. As of this writing, USD/CAD is currently trading near this level. Also note the correlation between Crude Oil and USD/CAD in the lower panel of the chart. The current correlation coefficient is -0.83. After months of depreciation in the USD/CAD and Crude Oil correlation, it is finally back in line. Readings below -0.80 are considered strong negative correlations. Therefore, these two assets have a strong negative correlation.
Source: Tradingview, Pierre X
On a 240-minute time frame, USD/CAD recently broke through the neckline of a Head and Shoulders pattern. The target of the pattern is the distance from the head to the neckline, added to the breaking point from the neckline. In this case, the target is near 1.2450, which is also near the bottom of the long-term range. The price must convincingly break through 1.2660 if it is to achieve the target. There is no further support ahead of 1.2450. The 50-day moving average acts as the first level of resistance near 1.2707 (see daily), then horizontal resistance at 1.2718. If the price breaks above, the next level of resistance is at the neckline of the head and should move closer to 1.2785.
Source: Tradingview, Pierre X
The next move for USD/CAD may depend on WTI Crude Oil. Note that the correlation coefficient on the 240-minute period is even stronger than that on the daily period at -0.88. Therefore, if Crude Oil continues to rise, there is a good chance that USD/CAD will continue to fall.
With the Bank of Canada’s interest rate decision on Wednesday and the US non-farm payrolls on Friday, there is potential for volatility this week in USD/CAD. Moreover, the correlation between USD/CAD and WTI Crude Oil is again strong. Watch the direction of Crude Oil for possible clues as to where the USD/CAD could head next.