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  • Dollar bulls are back in town as the US stock market corrects the 2020 highs.
  • Risk-off markets are weighing on the commodity complex taking CAD lower.

USD/CAD is currently trading around the highs of the day following a spike from 1.3086 to a high ay 1.3204 in a series of mostly bullish hourly bars as the US dollar firms on a Wall Street correction.

The US dollar has established a firmer tone pertaining to weakness in the G10’s domestic economic and political backdrops with such risks as Brexit, the European Central Bank and Bank of Canada meetings this week. 

The DXY traded at a three-week peak as Wall Street came back online and with stocks falling, extending last week’s decline in what some analysts say is a long-overdue correction. 

The risk-off tone is not favourable to the commodity complex which is based in US dollars. At the time of writing, the CRB index is down 2.53%.

If the correlations persist, then further cleanouts of positions on Wall Street could lead to a protracted comeback in the US dollar. 

All eyes on the central banks

Focus will be on both the European Central Bank and the Bank of Canada which will be their first meetings since the Fed’s recent announcements

Staying with the Bank of Canada, it is set to keep interest rates unchanged at 25bp.

The BoC will only be accompanied by a statement with the next Monetary Policy Report due at next month’s meeting on October 28th but Governor Tiff Macklem will release an economic report on Thursday.

The statement is likely to maintain a cautious tone. Despite recent data printing above the Bank’s worst fears, significant risks remain and there is still considerable slack,

analysts at Rabobank said, adding that bond purchases are likely to remain at a minimum of CAD 5bn a week but we remain of the view that this might need to be increased further down the line.

USD/CAD levels

Analysts at Rabobank maintain our view that USD/CAD will trade north of 1.34 in Q4.

On the other hand, if we see some stabilisation in equity markets and short-lived and limited spillover into FX, that would argue for a more neutral or modestly bullish view on the CAD, closer to 1.3000.

Meanwhile, monthly support has held and we bulls might wish to not overhead weekly resistance at the 38.2% Fibonacci level.

A test and failure there would open prospects of a run back to the prior daily structure before a bullish bias can build up from there again: