USD/CAD: Failed Try To Achieve Larger Ranges Might Lead To New Lows
matejmo
Since printing this yr’s excessive on January 3, at 1.3685 USDCAD did not proceed increased and has trended decrease because the Loonie strengthened on the next present account stability which was optimistic for September 2022 as a share of GDP.
The present account stability for the USA was a deficit of three.6% to GDP in the identical month. And whereas the present account for Canada is anticipated to show destructive once more within the coming months, forecasts are below a deficit of 1% to GDP.
Whereas forecasts for the US present account deficit stay above a deficit of three%. Stability of funds just isn’t the one issue and rates of interest presumably play a bigger position. Nonetheless, rates of interest are anticipated to extend in Canada alongside the traces of the Fed tightening coverage.
Extra importantly, bond yields are very related in Canada and the US. So, in my view, the rate of interest issue is minimal amongst two extremely developed and related economies. And different components corresponding to expectations on inflation and present account stability can have a better affect on the FX charge.
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The chart above reveals the yield curve for Canadian bonds and treasuries. Beneath now we have the identical curve for US bonds and treasuries. The unfold between the 2 curves is minimal and is probably going to not be a giant driver of the FX charge on this forex pair.
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Inflation additionally has a giant position in FX charges, since increased inflation charges will lead central banks to take a more durable stance on their financial tightening insurance policies. Canada has skilled a barely decrease inflation charge than the US over the previous months.
Nonetheless, Canadians are expecting inflation to develop to 7.18% by January 2024. That is a pointy distinction to US data that present expectations of 5.2% inflation in a single yr. Inflation expectations could be self-fulfilling and result in increased inflation.
The annual GDP progress charge is one other issue that influences the FX charge. The newest information reveals an annual GDP progress charge for Canada at 3.9% whereas the US charge is 1% over the identical interval for the earlier yr.
Nonetheless, the annualized progress charge for This autumn 2022 was 2.9% for each economies. The elemental information when it comes to GDP progress and rates of interest are pretty aligned for each currencies. I might see demand for CAD coming from business commerce and monetary funding flows.
As now we have seen above the present account stability favors Canada which has a surplus and is anticipated to have a smaller deficit to GDP within the subsequent 2 quarters.
Technical View
Let’s take a look on the technical evaluation of USDCAD from brief, medium, and long-term viewpoints. The every day chart beneath reveals the forex pair on a every day chart. We will see that worth motion tried a break above the Ichimoku cloud between the tip of 2022 and the start of 2023.
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The 2 makes an attempt to interrupt by way of the cloud on December 7 and 16 then gave method to a bear market. Worth motion has been beneath the cloud since January 9, indicating a short-term bear pattern. Day by day candles have been posting decrease highs and lows since January 3.
We will additionally see that the central financial institution selections in Canada and the US did not have an ideal influence on the present pattern. Though the Fed hike did ship the greenback increased, it nonetheless stays to be seen if the bear pattern will likely be turned.
The RSI is simply above 50 and effectively above its transferring common indicating extra bullish momentum could also be on its means. Nonetheless, the RSI hasn’t made it anyplace close to 70 or 30 lately. These are ranges that point out a bullish and bearish pattern respectively.
Resistance & Help
The primary resistance stage can be within the zone of 1.3520, which is a latest excessive that ended its run on the underside of the cloud. And which additionally coincides with the cloud over the subsequent days.
If that stage is damaged I might anticipate extra resistance on the 1.3702 stage, which is the place the USDCAD tried to interrupt above the cloud.
The following assist stage, if the market continues to pattern decrease, can be on the 1.3251 stage which is a low touched 4 occasions again in November 2022.
The weekly chart beneath reveals worth motion above the cloud and an ongoing bullish pattern. We will see the formation of a triangle (blue traces) that has fashioned over the previous 17 candles. With each side of the triangle having been touched twice.
Presumably, the third contact will result in a breakout of the sample, whether or not increased or decrease. Because the triangle has fashioned on a rally the almost certainly occasion is a break upwards. Nonetheless, for the subsequent medium-term pattern to ascertain worth motion wants to interrupt both facet of the triangle first.
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The month-to-month chart beneath is extra consistent with my expectations for a stronger Loonie within the coming months. Worth motion has been in a variety since April 2015. The channel for the sideways pattern is ready by two touches on the low on the 1.2056 zone and two touches on the excessive on the 1.4116 zone.
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That is a really broad channel, however it’s nonetheless a sideways sample. The present leg of motion began after touching the low of the channel in Could 2021. Nonetheless, the final 6 candles have discovered resistance on the high facet of the Ichimoku cloud.
Failure to interrupt the cloud to the upside ought to result in additional lows, the place the market might meet resistance on the blue line. A break of that line on the month-to-month chart might result in worth motion discovering assist on the 1.2334 stage after which the subsequent assist at 1.2056.
Remaining Takeaway
I see the Loonie strengthening as a result of a greater present account stability to GDP, and an financial system that’s recovering extra rapidly in comparison with final yr. Rates of interest are just about parallel with a small favor to US greenback payments.
Nonetheless, that was in all probability factored in and was why the FX charge reached earlier highs. I see a mixture of indicators on the technical facet, however as a result of my basic skew, I might forecast a break to the draw back of the triangle on the weekly chart and extra draw back worth motion within the coming month.