USD/CAD is down 130 pips from yesterday’s high. More importantly, it’s back below the tops of the long-term range in what could be another rejection of the long-term tops just below 1.40.
Zooming out to the weekly chart shows the importance of resistance in the 1.39-1.40 range as that’s blocked the path of this pair four times in the past two years.
I don’t think you need to know anymore than the chart right now as the stiff rejection this week (at least so far) is enough to abandon short-term breakout hopes. But the fundamentals do show why the top was challenged. The market is putting a focus on sagging global growth, which you can see in falling oil and commodity prices.
Early in the latest uptrend, cracks in Canada were visible but now they’re also starting to show up in the US. That’s led to some rapid pricing in of Federal Reserve rate cuts. That’s capped US dollar gains in this pair and elsewhere.
I think the market is a bit out over its skis in pricing in a 63% chance of 50 bps in September and 104 bps by year end. If the market has a re-think of that, it will help to lift the US dollar and re-affirm the theme of US (and USD) outperformance. That’s helped by a US deficit running at 7% of GDP that’s set to continue next year.
Meanwhile, the Canadian housing market is wilting and there are mounting signs that the Canadian consumer is tapped out. The market has priced in a BOC cut in Sept, Oct and an 80% chance of another in December. From where I stand, the odds of 50 bps in Canada are far higher than in the US; and if the US cuts 50 bps at any point, the BOC will surely follow.
For now, I think the market wants to gather more evidence of economic weakness. I can see the stormclouds on the horizon but we might need to hear the sounds of the raindrops before USD/CAD breaks this range. When it does, I would expect to see a quick move to 1.42, at the minimum.
I spoke with Reuters about the loonie earlier today.
This article was written by Adam Button at www.forexlive.com.
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