USD/CAD: Current levels starting to look attractive to enter long positions - Rabobank

Christian Lawrence, Senior FX Strategist at Rabobank, suggests that the week ahead for USD/CAD will not just be about oil however, with rate differentials likely to prove key as well and the data out of Canada are largely second tier although the release of the BoC Financial Stability Report and subsequent press conference from Governor Poloz on Thursday will be of interest.

Key Quotes

“That said, for USD/CAD, even that release is likely to be overshadowed by events north of the border on the previous day. Indeed, although there are a veritable slew of data releases scheduled in the US this week including retail sales, industrial production and PPI inflation numbers out on Wednesday, CPI inflation on Thursday and housing data on Friday, attention will be firmly fixed on the FOMC decision on Wednesday.”

“We maintain our long held view that the Fed is likely to raise rates 25bp and market pricing and consensus now both reflect this view also. In addition to the decision itself, this meeting will also see the release of the new Summary of Economic Projections and the Fed’s new DOT plot and so we could certainly see some fireworks in terms of price action.”

“Technicals

USD/CAD has broken back below 1.32 and the 100 day moving average just below that level. 1.31 is now the next major support line ahead of the 200 day moving average at 1.3076 and the 1.30 handle. In terms of upside levels to watch for, the confluence of the 50 day moving average and the 38.2% Fibonacci retracement of the January to May sell-off currently sits at 1.333 and above there the psychological 1.35 handle comes into play before the 1.3575 50% Fibonacci retracement of the aforementioned sell-off.

Despite the speed of the move lower, our Rabo momentum indicator suggests the pair is in ‘neutral’ territory and although we would caution against catching a falling knife, we also think that current levels are starting to look attractive in terms of entering into long positions. We remain of the view that CAD is not pricing in sufficient enough of a Trump premium given the potential stance the US might take on trade come 20th January. That said, we would certainly preach caution ahead of the FOMC announcement.”