USD/CAD outlook: US dollar drops as June hike bets trimmed

The USD/CAD turned sharply lower today, breaking though some key levels including 1.3500 in a clean move. The sell-off has been trigged by broad US dollar weakness ahead of the US nonfarm jobs report on Friday. Consequently, the USD/CAD outlook has turned bearish, at least in the short-term anyway.

Why is the dollar selling off?

The reversal in the USD/CAD means it has now given up all of the gains made last week and some, when rising Fed rate hike bets saw the dollar rally across the board. But those expectations have been slashed following a speech by Jefferson, who has been nominated to take over as vice chairman of the Fed. Jefferson hinted of a “skip” in June, which prompted a quick reversal in rate-hike pricing. Harker also made similar comments.

As a result, the odds of a hike in June have fallen to around 30% from around 70%, and the dollar’s response has been a swift one.

The dollar has also come under pressure because of a soft ISM manufacturing PMI report, which also revealed a sharp drop in its prices paid index. We also saw a softer print on the Unit Labor Cost index. However, a rather strong ADP jobs report means the employment sector remains hot and argues against a rate cut any time soon.

Canadian data suggests BoC will remain hawkish

Recent data out of Canada suggests the North American nation is holding its own rather well. First quarter GDP, for example, was stronger than expected, suggesting the economy has maintained a lot of momentum. What’s more, recent inflation reports have revealed a steady rise in core goods prices while we have also seen an unexpected surge in shelter prices. In terms of employment, well there are not many concerns here. In recent months, we have also seen above-forecast jobs data, with the headline employment change beating expectations in every single of the past 8 months. The May jobs report will be published next Friday, a full week after the US nonfarm payrolls report is published.

If Canadian data continues to point towards an economy remain hot, then this should increase the odds of an additional 25 bps hike from the Bank of Canada in the upcoming month. At its next meeting on Wednesday, though, we are doubtful the BoC will deliver a hike as it will want to await more data to support the case for a hike. The BoC lifted rates to the current 4.5% at its January 25 meeting and has since sat pat for the next two meetings in March and April.

USD/CAD outlook: Technical Analysis

The breakout above the trend line couldn’t hold, which means we now have a failed breakout scenario on the USD/CAD. This means the USD/CAD is most likely heading to levels where trapped traders’ stops would be resting. One of those levels was below 1.3500, the base of last Wednesday’s breakout. This area has now been cleared. The bigger liquidity pools are likely to be below 1.33 and 1.32, given the multi-month higher lows that have been created between these levels.

This bearish technical setup will become invalidated should rates go on to climb back above 1.3550 resistance in the coming days.

Source: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.