Dovish BoC will support USDCAD
- US dollar consolidating gains
- Bank of Canada should remain dovish
- USDX rally pausing
- US rate hike prospects, dovish BoC, softer oil prices should keep USDCAD bid
By Michael O'Neill
FX traders are cautiously awaiting US Federal Reserve chief Janet Yellen's blessing (on Friday) of the hawkish rhetoric delivered by a flock of Fed speakers over the past several days.
It is a short week in Canada. Canadian markets were closed yesterday. The Victoria Day national holiday (always the Monday before May 25) is ostensibly to celebrate Queen Victoria’s birthday, but is really just the unofficial kick-off to summer and colloquially know as “May two-four weekend”. After all, in Canada, beer is sold in cases of 24.
The highlight of the week for the loonie will be the Bank of Canada's statement on Wednesday at 1500 GMT.
The BoC's April 13 statement announced that recent global and domestic developments would have led to a modest downgrade to the bank’s outlook. That didn’t happen, however, because of the anticipated economic benefits from the fiscal stimulus package announced by the federal government.
Since that meeting, Canada posted a record trade deficit, weak manufacturing shipments and poor Retail Sales data. On the plus side, inflation is rising, with core CPI at 2.2%.
The BoC will assess the domestic data through the din of Fed speakers touting the merits of a US rate increase while dealing with the uncertainty of the impact of the Alberta wildfires on the domestic economy. Chances are that Wednesday’s BoC statement will be dovish, leaving a whiff of “rate cut” in the air.
USDCAD technical outlook
The May USDCAD rebound has been quick. After breaking above 1.2590 on May 2, the uptrend line from 1.2462 has been tested a couple of times, but not seriously, and that uptrend remains intact while prices are above 1.3030. That line is being defended by support in the 1.3060-80 area, representing previous tops and bottoms. The 38.2% Fibonacci retracement of the 2016 range comes into play in the 1.3300-20 area, which makes for a nice, near-term target.
USDCAD 4-hour chart
USDX rally stalling
The US dollar index rally from the beginning of May has been steep, but is stalling ahead of resistance in the 95.50-70 area representing the downtrend line from the January peak and prior tops and bottoms. However, downside moves may be shallow and contained by support in the 95.00-20 area.
USDX hourly chart
Yellen stamp of approval
Arguably, Fed chief Yellen’s speech on Friday afternoon will be the most important event of the week for markets. Unfortunately, the reaction to her remarks may be limited due to the long weekend holidays: Memorial Day in the US and a bank holiday in the UK.
Nevertheless, FX markets will be seeking evidence that Yellen is validating the hawkish comments from a gaggle of Fed speakers in the past several days. Traders have lifted the odds of a June Fed rate hike to 30%, leaving a lot of upside ground to cover in the event of hawkish remarks.
Still, this Federal Open Market Committee is noted for sending mixed messages, which is probably why the odds aren’t any higher.
Oil consolidating in broad band
The oil price rebound has been resilient, but has stalled in the $46.00-$50.00/barrel area. The evidence that US crude oil stocks are diminishing is inconclusive, whereas price support from supply disruptions (Canada, Nigeria) appear to be offset by production increases in Iran. Furthermore, many commentators report that US shale companies can survive with WTI in the $45.00/b area.
WTI technicals are bullish while trading above $47.75/b, but need to overcome resistance in the $50.00-$51.00 area to extend gains to $55.00. A break below $47.70/b would lead to a retest of $45.00.
WTI 4-hour chart
The prospect of higher US rates, a dovish Bank of Canada and a downward correction in oil prices should keep USDCAD bid for the balance of the week.