Canadian Dollar Talking Points
USD/CAD trades below the 1.3000 handle for the first time since 2018, and the bearish behavior may persist ahead of the Federal Open Market Committee (FOMC) Minutes as the Relative Strength Index (RSI) dips into oversold territory.
USD/CAD Rate Trades Below 1.3000 Ahead of FOMC Minutes
USD/CAD clears the range-bound price action carried over from the third quarter of 2019, and developments coming out of the US may continue to drag on the exchange rate as the Senate appears to be on track to pass the United States-Mexico-Canada Agreement (USMCA) over the coming days.
The trade agreement may heighten the appeal of the Canadian Dollar as it encourage the Bank of Canada (BoC) to retain the current policy, and Governor Stephen Poloz and Co. may largely endorse a wait-and-see approach at the next meeting on January 22 as “the Bank continues to expect inflation to track close to the 2 percent target over the next two years.”
It remains to be seen if the FOMC Minutes will reveal anything new as the update to the Summary of Economic Projections (SEP) shows the benchmark interest rate sitting at 1.50% to 1.75% though 2020, and Chairman Jerome Powell and Co. may adopt a less dovish tone at the next rate decision on January 29 as Fed officials “believe that the current stance of monetary policy will support sustained growth, a strong labor market, and inflation near our symmetric 2 percent objective.”
In turn, the rotation within the FOMC may do little to influence the monetary policy outlook, but market participants may pay increased attention to Philadelphia Fed President Patrick Harker, Dallas Fed President Robert Kaplan, Minneapolis Fed President Neel Kashkari and Cleveland Fed President Loretta Mester as they become a voting member in 2020.
With that said, the yearly opening range for USD/CAD remains in focus as it extends the string of lower highs and lows from the previous week, and the exchange rate may attempt to test the October 2018 low (1.2782) as the Relative Strength Index (RSI) dips into oversold territory.
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USD/CAD Rate Daily Chart
Source: Trading View
- Keep in mind, the rebound from the July low (1.3016) has failed to generate a test of the Fibonacci overlap around 1.3410 (38.2% expansion) to 1.3420 (78.6% retracement), with USD/CAD snapping the range bound price action from the third quarter as the exchange rate slips below the 1.3000 handle.
- The Relative Strength Index (RSI) highlights a similar dynamic as the oscillator dips into oversold territory for the first time since 2018.
- Need a break/close below the Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement) to open up the next downside hurdle around 1.2830 (38.2% retracement), with the next area of interest coming in around 1.2720 (38.2% retracement) to 1.2770 (38.2% expansion).
- Will keep a close eye on the yearly opening range along with the Fibonacci overlap around 1.3030 (50% expansion) to 1.3040 (61.8% expansion) to see if the former support zone will act as a resistance.
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— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong.