USD/CAD bears break key daily dynamic support, eye 1.2420 ahead of BoC
- USD/CAD bears step in as the US dollar catches a safe-haven bid.
- Global growth concerns have emanated from the US jobs reported Friday.
- All eyes on the BoC this week and Fed speakers.
As per the start of the week's analysis, US dollar: A bearish false start?, the US dollar has indeed erased all losses sustained after last week's poor US Nonfarm Payrolls report.
It was noted that while the jobs report was a dismal outcome, ''while terrible, it was only one of many other very strong reports.''
When America sneezes ...
There is a saying, ''when America sneezes, the rest of the world catches a cold.''
While the Delta variant may well have had a major effect on the US jobs market, ''the US is not the only economy exposed to the risk of the delta spreading. It all goes back to relative performances,'' as was stated in that prior analysis.
''The US dollar may hold up better than expected since a US recession would likely be part of a broader global downturn.''
Indeed, it would appear that the US dollar has bounced back as concerns about slowing global growth boosted its safe-haven appeal in holiday-thin trade ahead of major central bank meetings today and later this week.
The knee jerk reaction to the jobs data was understandable as it doused hawkish expectations at this month's US Federal Reserve interest rate meeting.
However, markets are now having to weigh the implications for global growth as a whole and should America be starting to lose steam, there are negative implications for the pace of work growth as a whole.
This would be a significant headwind for cyclical and the commodity complex currencies such as the euro, Aussie and CAD.
Meanwhile, the Bank of Canada meeting this week will be very important.
That being said, no changes are expected ahead of the Federal elections. However, policy normalisation is already well underway and markets are weighing how overvalued the greenback is to the loonie.
The BoC has been vocal with its intention to raise rates “in the second half of 2022” when inflation, on the BoC’s forecasts, consistently hits 2%. That is a huge support for the domestic currency in itself.
''The Bank will have to acknowledge the outlook has weakened after Q2 GDP, but we do not expect it will move from its current timeline for the output gap to close in H2 2022,'' analysts at TD Securities said,
''Recent strength in CPI also supports maintaining the status quo, even if the BoC reiterates that temporary factors are driving inflation.''
USD and CAD positioning
As for the futures markets, the latest positioning data shows speculators have added to their long USD index positions moderately and they are now at their highest levels since early March 2020.
However, the end of the week's report will reflect the market's appetite for the greenback following the August NFP disappointment, so we could see some bearish readjustment in there.
Fed speakers this week will be important in this regard, for dovish tones will likely weigh on the greenback.
As for CAD positioning, net speculators’ CAD positions fell into negative territory for the first time since December 2020.
The move likely reflects the market's reaction to the surprise fall in the second quarter Gross Domestic Product.
Going forward, investors will be concerned about the risks surrounding not only the election but the spread of the highly contagious Delta variant of coronavirus and oil prices too.
USD/CAD technical analysis
The price is testing the 50-day EMA through the lows today after it closed below the July 1 formed daily trendline support:
If the price finds resistance at old support and within the 50% mean reversion range, then a downside continuation below the counter-trendline would be expected.
The July 30 swing lows could come under pressure in such a scenario near 1.2420.
On the other hand, a break back into the bullish trend would leave the bulls back in control with 1.27 the figure eyed as a key psychological resistance.