Tests resistance ahead of BoC decision :: InvestMacro

• USDCAD ended August ↓ 2.3%

• BoC decision + US jobs report = volatility?

• Traders fully priced in 25 bp cut by BoC this week

• Bloomberg FX model: 74% – (1.3400 – 1.3675)

• Key technical levels –  1.3550 & 1.3600

After tumbling over 2% in August, the USDCAD has kicked off the new month on a bullish note.

Prices jumped over 60 pips on Tuesday, testing key resistance at 1.3550 ahead of the Bank of Canada rate decision on Wednesday.

The USDCAD’s recent upside could be based around a weaker Canadian Dollar. It is worth noting that the CAD has slipped against most G10 currencies this week thanks to lower oil prices and expectations around a BoC rate cut.

Looking at the charts, prices remain under pressure on the weekly charts with the 100 and 50-week SMA acting as key levels of resistance.

Nevertheless, a significant move may be on the horizon and here are 3 reasons why…

    1) Bank of Canada rate decision

On Wednesday, September 4th, the Bank of Canada (BoC) will announce its rate decision.

Weak economic data from Canada have boosted expectations around the BoC cutting interest rates for the third time this year.

Traders have fully priced in a 25-basis point BoC cut by September, another cut by October and one final cut by December!

Note: The latest jobs data from Canada will be published on Friday, September 6th. The unemployment rate is expected to tick higher to 6.5% from 6.4% in the previous month while net change in employment is seen rising to 26.5k after declining by 2.8k in June.

• Should the BoC move ahead with a rate cut in September and signal further cuts down the road, this could push the USDCAD higher.

• An outcome where the central bank sounds less dovish than expected could strengthen the Canadian Dollar, pulling the USDCAD lower as a result.

Golden nugget: Over the past year, the BoC rate decision has triggered upside moves as much as 0.35% of declines of 0.1% in a 6-hour window post-release.   

 

    2) Key US jobs report

As highlighted in our week ahead report, the major event this week is the US jobs data on Friday.

Given how investors may use this as a guide to how quick or slow the Fed will cut rates from September onwards, this data could rock global financial markets.

The US economy is expected to have created 165k new jobs in August with the unemployment rate ticking lower to 4.2% and average hourly earnings rising to 3.7% year-on-year compared to 3.6% in the previous month.

• If the unemployment rate ticks lower to 4.2% and cools recession fears, this may end up boosting the USD – pushing the USDCAD higher.

• A scenario where the unemployment rate remains at 4.3% or even higher could fuel recession fears – boosting bets of a 50 bp cut. Given how this is likely to weaken the USD, the USDCAD could end up tumbling.

Traders have fully priced in a 25-basis point Fed cut by September with a 34% probability of a 50 bp move.

Golden nugget: Over the past 12 months, the US jobs report has triggered upside moves as much as 0.4% of declines of 0.3% in a 6-hour window post-release.

 

    3) Technical forces

USDCAD bulls could be handed more power if prices secure a solid daily close above 1.3550. Still, lagging indicators seem to be favour bears with prices still trading below the 50, 100 and 200-day SMA.

• A solid breakout above 1.3550 may inspire an incline toward 1.3600 and 1.3677.

• Should 1.3550 prove to be reliable resistance, this could see prices decline toward 1.3450 and 1.3400.

Bloomberg’s FX model points to a 75% chance that USDCAD will trade within the 1.3400 – 1.3675 range over the next one-week period.