USD/CAD Faces Key Test as BoC Shift Monetary Policy Outlook


Talking Points:

USD/CAD Faces Key Test as BoC Shift Monetary Policy Outlook.

Australian Dollar Holds June-High Ahead of Employment Report.

The Canadian dollar has staged a meaningful advance as Bank of Canada (BoC) Senior Deputy GovernorCarolyn Wilkins warns the central bank will be ‘assessing’ the degree of monetary stimulus as ‘growth continues and, ideally, broadens further,’ and the Governing Council may continue to change its tune over the coming months as ‘the Canadian economy’s adjustment to lower oil prices is largely complete and recent economic data have been encouraging.’

Keep in mind the broader bias for USD/CAD remains constructive as the Federal Open Market Committee (FOMC) appears to be on course to implement three rate-hikes in 2017, and the fresh updates from Chair Janet Yellen and Co. may heighten the appeal of the greenback especially if the central bank unveils a more detailed exit strategy. However, the near-term outlook remains tilted to the downside as the dollar-loonie exchange rate clears the April-low (1.3223), and the pair may continue to give back the advance from earlier this year as it appears to be on its way to threaten the bullish formation carried over from 2016.

USD/CAD Daily

USD/CAD Daily Chart

Chart – Created Using Trading View

  • With dollar-loonie quickly approaching channel support, USD/CAD faces a key test, with a break of the long-term bullish structure highlighting a potential shift in market behavior; keeping a close eye on the Relative Strength Index (RSI) as it fails to preserve the upward trend carried over from December and appears to be pushing into oversold territory.
  • USD/CAD may continue to carve a series of lower highs & lows over the coming days as the bearish momentum appears to be gathering pace, with the pair at risk for further losses as long as it holds below the former-support zone around 1.3280 (50% retracement) to 1.3310 (38.2% retracement).
  • Next downside region of interest coming in around 1.3150 (78.6% retracement) followed by the Fibonacci overlap around 1.2970 (23.6% expansion) to 1.2990 (23.6% retracement).

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Despite the limited reaction to the NAB Business Confidence survey, the Australian dollar struggles to hold its ground, with AUD/USD at risk for a near-term pullback as it fails to break the June-high (0.7567).

The lack of momentum to extend the bullish series from earlier this month suggests the near-term advance in AUD/USD could be coming to an end, and the pair may continue to operate within the 2016-range as the Reserve Bank of Australia (RBA) sticks to a wait-and-see approach. Nevertheless, Australia’s Employment report may heighten the appeal of the local currency as the economy is anticipated to add another 10.0K jobs in May, but the data may do little to alter the monetary policy outlook as Governor Philip Lowe and Co. warn ‘growth in housing debt has outpaced the slow growth in household incomes.

AUD/USD Daily

AUD/USD Daily Chart

Chart – Created Using Trading View

  • Broader outlook for AUD/USD has perked up as the pair breaks out of the downward trend from March, with the Relative Strength Index (RSI) highlighting a similar dynamic, but failure to break the topside hurdle around 0.7580 (38.2% retracement) to 0.7600 (23.6% retracement) may keep the pair capped over the coming days.
  • May see the aussie-dollar exchange rate search for support, with the first region of interest coming in around the 0.7500 (50% retracement) handle followed by 0.7450 (38.2% retracement).

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IG Sentiment

  • Retail trader data shows 64.1% of traders are net-long USD/CAD with the ratio of traders long to short at 1.78 to 1. The percentage of traders net-long is now its highest since February 10 when USD/CAD traded near 1.30827. The number of traders net-long is 25.1% higher than yesterday and 20.2% higher from last week, while the number of traders net-short is 15.6% lower than yesterday and 34.0% lower from last week.
  • Retail trader data shows 43.4% of traders are net-long AUD/USD with the ratio of traders short to long at 1.3 to 1. In fact, traders have remained net-short since June 04 when AUD/USD traded near 0.74861; price has moved 0.7% higher since then. The number of traders net-long is 5.5% higher than yesterday and 0.2% lower from last week, while the number of traders net-short is 9.1% lower than yesterday and 7.7% higher from last week.

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— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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