With the Bank of Canada interest rate decision on Wednesday and 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 favorite measure of inflation, Core PCE, was 4.9% YoY for April vs 5.2% YoY in March. Although the print was slightly weaker than the preceding month, it is still near a 40-year high. Recall that earlier this month, Powell said that getting inflation down may come at the expense of a 3.6% Unemployment Rate. Markets will find out more this week when the US releases Non-Farm Payroll on Friday. Expectations are for 320,000 new jobs to have been added to the economy in May vs +428,000 in April. The Unemployment Rate is expected to drop even 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 15th.
Canada released Q1 GDP on Tuesday. Annualized, the Q1 print was 3.1% vs 5.4% expected and 6.6% in Q4, 2021. Although this data is old, the Bank of Canada may have to take into consideration that the economy is not growing as fast as previously thought when it meets on Wednesday to discuss monetary policy. Expectations are that the central bank will raise rates by 50bps, 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 down to the targeted level of 2%. Committee members also said that they expect inflation to average 6% in the first half of 2022 up from 5% in January. The April CPI reading 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 surprises the markets raises 75bps!
USD/CAD had been trading within a range since mid-November 2021 between 1.2454 and 1.2965. On May 9th, the pair finally broke out of the top of the channel to a high of 1.3077 and failed. USD/CAD moved once again back inside the channel and has been moving lower since. On May 30th, the pair fell over 0.5% and broke below key support levels at the 50 Day Moving Average, the 200 Day Moving Average, and the 61.8% Fibonacci retracement level from the low of April 5th to the high of May 12th near 1.2660. At the time of this writing, USD/CAD is currently trading near that level. Also notice the correlation between Crude Oil and USD/CAD in the bottom panel of the chart. The current correlation coefficient is -0.83. After months of the USD/CAD and Crude Oil correlation falling out of favor, it has finally come back in line. Readings below -0.80 are considered strong negative correlations. Therefore, these two assets have a strong negative correlation.
Source: Tradingview, Stone X
On a 240-minute timeframe, USD/CAD has recent broken the neckline of a Head and Shoulders pattern. The target for the pattern is the distance from the head to the neckline, added to the breakdown point from the neckline. In this case the target is near 1.2450, which is also near the bottom of the long-term range. Price must break convincingly through the 1.2660 if it is to reach the target. There is no additional support before 1.2450. The 50 Day Moving Average acts as the first resistance level near 1.2707 (see daily), then horizontal resistance at 1.2718. If price breaks above, the next resistance level is at the neckline of the head and should pattern near 1.2785.
Source: Tradingview, Stone X
The next move for USD/CAD may be dependent on WTI Crude Oil. Notice the correlation coefficient on the 240-mintue timeframe is even stronger than the one on the daily timeframe at -0.88. Therefore, if Crude Oil continues to move higher, there is a strong chance that USD/CAD may continue to move lower.
With the Bank of Canada interest rate decision on Wednesday and US Non-farm Payrolls on Friday, there is potential for volatility this week in USD/CAD. In addition, the correlation between USD/CAD and WTI Crude Oil is strong once again. Watch the direction of crude oil for possible clues as to where USD/CAD may be headed next.