USD/CAD Analysis – Scenarios to Watch

The reelection of the Canadian Prime Minister Justin Tradeau didn’t have a significant impact on the Canadian Dollar. The September 8th Bank of Canada’s policy rate decision remained unchanged as Canada is still keeping rates at the lowest rate to continue the Bank’s quantitative ease program. Canada’s GDP for the second quarter depreciated by 1% which is below BoC’s estimate of July’s Monetary Policy report.

The US economic data was showing a significant growth with key metrics, which the FED is following, which are Job openings, Retail sales and Housing permits. Jobless claims demonstrate an overall decline, indicating the US economic recovery. In the first and second quarter these positive data would have worried investors with inflation fear and interest rate hike, however the FED will most likely keep the rates unchanged but will reduce its bond purchases.

Tapering bond purchases was announced by the FED Chairman Mr. Powell during the Jackson Hole Summit, despite keeping the exact date a secret, the Chairman noted that tapering will begin by the end of this year. Markets will be anticipating the announcement of the exact or estimated date of bond tapering which is most likely to happen, if it happens, during Mr. Powell’s speech after the release of economic projections.

Existing home sales and crude oil inventories data released today might play their role in the further activities of the US Dollar index, this is when the volatility begins. The crude oil inventories date is one of the key metrics for the crude oil prices and the Canadian Dollar is correlated to the global crude oil prices.

From the technical analysis point there are two main scenarios to watch for mid-term USD/CAD projection and I will add one short-term possible scenario.

The no-clue tapering asset purchases date might play a negative role to the US Dollar Index and since there will be a volatility, USD/CAD may jump to $1.2890 level and retrace to $1.2720 level pushed by the dynamic resistance of previous highs.

If the announcements are positive and the FOMC economic projection strengthens the confidence of investors in the US Dollar, then we might witness the USD/CAD’s continuation of an uptrend up to $1.29940 and $1.30900 levels, following an expanding diagonal pattern.

The second scenario looks least likely but indeed should be considered, this might take place if during the FOMC announcement rate hikes are adverted. In this case, in fear of rate hikes, the market might defect the US Dollar and USD/CAD might drop to $1.2580 and $1.2540 levels.

RSI and MACD indicators on a 4H USD/CAD signal the correction, namely a drop. RSI remains near overbought levels which show a decline when connecting the last three peaks. Key takeaways from the technical analysis are to watch the retest of the dynamic resistance of August 21, if USD/CAD closes above this level, the uptrend continuation will most likely take place with higher impulse. If there is a rejection, USD/CAD will correct to $1.2800 and $1.2720 below that.