USD/CAD rally unfolds ahead of US PCE report amid failed annual tests

Canadian Dollar Talking Points

The Canadian Dollar is tracking the rally in commodity bloc currencies as USD/CAD slips to a fresh weekly low (1.2895), and further data printouts from the US could fuel the Recent exchange rate weakness as the Personal Consumption Expenditure (PCE) Price Index is expected to show a slowdown in inflation.

USD/CAD rally unfolds ahead of US PCE report despite failed annual tests

USD/CAD seemed ready to test the yearly high (1.3224) after breaking the August opening rangebut the advance of the 200-day SMA (1.2763) slumps as the exchange rate breaks last week’s string of higher highs and lows.

Looking ahead, USD/CAD may continue to rebound from the monthly low (1.2728) as the core US PCE, the Federal Reserve’s preferred indicator for inflation, is expected to decline to 4, 7% in July vs. 4.8% yoy in the prior month, and signs of slowing price growth could affect the outlook for monetary policy as the central bank aims to foster a soft landing in the economy. American economy.

As a result, speculation of smaller Fed rate hikes could lead to a larger pullback in USD/CAD, with the central bank acknowledging that “it would probably become appropriate at some point to slow down the pace of key rate increases”, and it remains to be seen whether the Federal Open Market Committee (FOMC) will adjust the forward guidance for monetary policy as chairman. Jerome Powell and Co. are expected to update the Summary of Economic Projections (SEP) with the next interest rate decision on September 21.

Until then, USD/CAD may struggle to hold onto the early-month lead amid the failed attempt to test the annual maximum (1.3224)and a further decline in the exchange rate could fuel the recent reversal in retailer sentiment, similar to the behavior seen earlier this year.

Image of IG client sentiment for USD/CAD rate

The IG Customer Opinion Report shows 52.97% of traders are currently long fillet USD/CAD, with the ratio of long to short traders upright at 1.13 to 1.

The number of net long traders is 5.28% higher than yesterday and 20.75% higher than last week, while the number of net short traders is 5.82% lower than yesterday. yesterday and 6.77% lower than last week. The jump in net buying interest fueled the reversal in retailer sentiment, with 46.51% of traders net long in USD/CAD last week, while the decline in net downside occurs as the exchange rate trades a new weekly low (1.2895).

That said, a slowdown in the US PCE could keep USD/CAD under pressure as it dampens speculation for another Fed rate hike of 75 basis points, and the exchange rate could fall back to the downside. 200-day SMA (1.2763) as it breaks last week’s series of higher highs and lows.

USD/CAD daily rate chart

Image of daily USD/CAD rate chart

Source: Commercial view

  • USD/CAD seemed to be on track to test the annual maximum (1.3224) after breaking through the opening range for August, but the advance of the 200-day SMA (1.2763) may continue to collapse as long as the exchange rate fails to hold above the 1.2980 region (618% retracement).
  • A pause/closure below the Fibonacci overlaps around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion) could push the USD/CAD down 200-day SMA (1.2763)with a break below the 1.2770 zone (38.2% expansion) increasing the possibility of a run to the monthly low (1.2728).
  • However, failure to clear the overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion) could push the USD/CAD back towards the 1.2980 region (618% retracement)with a displacement above the Zone from 1.3030 (50% expansion) to 1.3040 (50% expansion) bringing the annual maximum (1.3224) back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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