- USD/CAD’s fate depends on the Fed and Sino/US trade talks next week.
- USD/CAD bulls getting set for corrections of massive short-covering.
USD/CAD has been confined to a narrow range of between 1.3118 and 1.3148, trading 0.1% up on the day so far and with a drop in oil prices and dialled back Fed expectations, the upside is buoyed. The price of USD/CAD has been breaking up out of the consolidative highs of this month as the markets get positioned for a less dovish than anticipated Federal Open Market Committee that clashes with Chinese/US trade talks getting back underway next week. The Loonie has been on the back foot for this week and giving back gains in Funds from 1.3015 lows to a high of 1.3164 posted yesterday.
Oil prices are a factor
Meanwhile, in recent news, the price of oil has been volatile of late, but in today’s session, Citing Kuwait’s news agency, KUNA, Reuters in the last hour reported that Saudi Arabia’s energy minister visited Kuwait to discuss resuming oil production in the Saudi-Kuwait Neutral Zone. This seems to have triggered an almighty sell-off with WTI extending losses from 57.62 highs all the way through to the 55 handles. This comes ahead of the Joint Commission of the Joint Comprehensive Plan of Action, (JCPOA) meeting scheduled for this Sunday which could ease tensions over Iran, somewhat. Moreover, stories of ample supply have been offsetting the upside risks for oil stemming from the implications of an extended closure of the Strait of Hormuz.
All eyes on the trade war talks, BoC and the Fed
The markets will be looking for direction from the Sino/US trade talks that will take place next Monday. U.S. Trade Representative Robert Lighthizer and senior U.S. officials are set to travel to China next week for the first high-level, face-to-face trade negotiations since talks broke down in May. However, the risk here is that reaching a final agreement to end the trade war could still take a long time and may never happen.
We have seen a bounce in risk appetite since the confirmations, but although equity markets have been buoyant, it was only recently that the IMF to lowered its estimate for global gross domestic product growth this year to 3.2 per cent based on how the US-China trade war is expected to weigh on the global economy. For that reason, the Federal Reserve is expected to cut interest rates by 25 basis points and they will be very attentive to how the talks are going next week as the Federal Open Market Committee officials sit down together to thrash out a plan for the rest of the year.
Boc vs Fed
The implications for USD/CAD rest on the two central banks. The Bank of Canada and Federal Reserve are expected to remain neutral, although wth the Fed’ easing by 25 basis points and the BoC staying put for the foreseeable future. Recent Consumer Price Index numbers confirmed that robust price growth remains a strong point in favour of a neutral BoC stance on monetary policy. Headline inflation decreased from 2.4% to 2.0% in June (as widely expected), but what is key is that all of the core measures have remained above the 2% BoC target mid-point.
“We believe the Bank of Canada will not decrease policy rates at least for the next 18 months, particularly when considering that:
- The BoC did not raise rates as fiercely as the Fed in the past few years and can therefore take its time before following any Fed easing
- The labour market remains tight: June’s decrease in jobs was all due to the part-time segment, while wage growth peaked
- The outlook for oil remains constructive after the OPEC+ output cuts
- The USMCA deal should soon be ratified, with reservations from US Democrat gradually fading…”
Analysts at ING Bank explained.
Should the outcome of the Fed be neutral, USD/CAD could be subject to a sharp correction to the upside, especially if trade talks do not seem to be ginging anywhere between the US and China, and with the Fed already ahead of the BoC in an insurance policy rate cut, the magnitude of CAD short-covering in recent weeks could be subject to a correction:
“On 4 June, market shorts on CAD were 27% of open interest, whereas the latest numbers show net longs amounting to 6% of open interest. No other currency in the G10 space has displayed such a marked upside move in net speculative positions in the same period,”
analysts at ING bank explained.
USD/CAD levels
USD/CAD technical analysis: Set-up seems tilted in favour of bullish traders, 1.3150 marks a key hurdle
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