USDCAD Outlook

USDCAD Outlook: Ascending channel favours bullish traders ahead of BoC on Wednesday

(Haresh Menghani – FXStreet)

– USD/CAD drifts lower during the first half of trading on Tuesday amid modest USD weakness.

– A softer tone surrounding oil prices undermines the loonie and helps limit losses for the major.

– Investors now eye US ISM Services PMI, though the focus remains on the BoC on Wednesday.

The USD/CAD pair extends the overnight pullback from the 1.3175 area and edges lower through the Asian session on Tuesday. The downtick is sponsored by a modest US dollar weakness, albeit lacks any follow-through selling. The Chinese government vowed more measures to support economic growth and boosted investors’ confidence. This, in turn, drags the safe-haven buck away from a two-decade high touched the previous day. That said, firming expectations for a more aggressive policy tightening by the Federal Reserve and elevated US Treasury bond yields help limit the USD pullback.

In fact, the markets are currently pricing in a greater chance of a supersized 75 bps Fed rate hike move in September. This remains supportive of elevated US Treasury bond yields. Apart from this, a softer tone surrounding crude oil prices undermines the commodity-linked loonie and assists the pair to reverse a dip to sub-1.3100 levels. An OPEC+ deal to cut output by 100,000 barrels per day in October was seen as a symbolic move. This, along with worries that a global economic downturn and COVID-19 restrictions in China will dent fuel demand, weighs on the black liquid.

Nevertheless, the USD/CAD pair maintains its offered tone through the first half of trading. There isn’t any major market-moving economic data due for release from Canada on Tuesday. The US economic docket, meanwhile, features the release of the ISM Services PMI. This, along with the US bond yields and the broader market risk sentiment, will drive the USD demand and provide some impetus to the major. Traders will further take cues from oil price dynamics to grab short-term opportunities. The focus, however, will remain on the Bank of Canada policy meeting on Wednesday.

The Canadian central bank is widely expected to deliver yet another oversized interest rate hike. Some economists, however, predict the BoC may signal a pause after the anticipated hike amid recession fears. Hence, the accompanying monetary policy statement will be looked upon for fresh clues about the near-term outlook. This, in turn, will play a key role in influencing the Canadian dollar and help determine the next leg of a directional move for the USD/CAD pair.

USDCAD Technical Outlook

From a technical perspective, the recent strong move up from the August monthly swing high faltered near a resistance marked by the top end of an ascending trend channel. Spot prices, however, continue to show some resilience below the 1.3100 round-figure mark and the emergence of some dip-buying favours bullish traders. Hence, a subsequent move back above an intermediate hurdle near the 1.3165 region, en route to the 1.3200 mark, looks like a distinct possibility. This is closely followed by the YTD peak, around the 1.3225 region, which coincides with the trend-channel resistance. A convincing breakthrough will mark a fresh breakout and pave the way for a further near-term appreciating move.

On the flip side, sustained weakness below the 1.3100 mark is likely to find decent support near the 1.3075-1.3070 region. Any further pullback could be seen as a buying opportunity near the trend-channel support, currently around the 1.3035-1.3030 area. The latter should act as a strong base for the USD/CAD pair, which if broken decisively will negate the near-term positive outlook and shift the bias in favour of bearish traders. Spot prices might then turn vulnerable to challenge the 1.3000 psychological mark and eventually drop to the next relevant support near the 1.2970-1.2960 region.