**Trade of the Week: Long USD/CAD Position Appears Supported by Technical and Fundamental Drivers**
*Original analysis inspired by Chris Beauchamp, IG UK*
The US dollar to Canadian dollar currency pair (USD/CAD) is gaining traction as a potential long trade opportunity, driven by shifting macroeconomic trends, robust US economic data, and technical support suggesting further upside. Let’s delve into the fundamentals behind the bullish case for USD/CAD, a technical outlook that supports a long position, and contributing geopolitical and commodity price themes that could continue fueling price action in favor of the US dollar.
This article incorporates insights and analysis from IG Group’s Chris Beauchamp while supplementing the broader picture with current market data from reliable economic sources and financial institutions.
## Why Consider a Long USD/CAD?
Several converging events and indicators make the long USD/CAD trade appealing in the near term. These factors include diverging monetary policy expectations between the United States and Canada, higher oil volatility, a potential near-term bottom in USD/CAD technically, and less hawkish sentiment from the Bank of Canada.
## Macroeconomic Drivers Supporting a Long USD/CAD Trade
### Diverging Monetary Policies: Fed vs. BoC
– In the United States, the Federal Reserve has maintained a relatively hawkish stance in the face of still-elevated inflation pressures across key sectors, especially services and housing.
– Fed officials have emphasized the need to see continued progress toward the 2% inflation goal before cutting rates. As of early June 2024, the market is pricing in fewer rate cuts than initially expected, with the first potential cut now seen around September, if at all this year.
– Conversely, the Bank of Canada (BoC) has already begun to signal dovishness. On June 5, the BoC cut interest rates by 25 basis points, bringing the benchmark overnight rate to 4.75%, reflecting a softening domestic economic outlook.
– BoC policymakers cited easing inflation pressures, weaker consumer demand, and signs of economic stagnation as reasons for their shift. Additional rate cuts are expected in the coming months, according to interest rate futures and forward guidance.
The divergent paths of the Fed and BoC increase the likelihood of continued capital flows toward the US dollar and away from the Canadian dollar.
### Slowing Canadian Economy
– Canada saw its GDP contract marginally in Q1 2024, with the annualized GDP reading coming in below expectations at just 1.7%, compared to 2.3% expected.
– Employment growth is also showing signs of weakness. The unemployment rate has ticked up to 6.1% as of May 2024, compared with 5.7% at the start of the year.
– Consumer sentiment continues to fall as high interest rates weigh on consumer credit, mortgage renewals, and real estate markets across major Canadian cities.
– Inflation has cooled in Canada, clocking in at 2.7% in May 2024 on a year-over-year basis, allowing the BoC more room to cut interest rates.
### Crude Oil Price Volatility
– The Canadian dollar is highly correlated with crude oil due to Canada’s significant energy exports. But recently, oil prices have not been offering the CAD the protection it traditionally enjoys.
– Oil prices have remained highly volatile in 2024, largely due to OPEC+ actions, macroeconomic uncertainty, and shifting demand forecasts from the US and China.
– WTI Crude prices have hovered around the $75 mark, showing no sustained break higher amid global demand concerns.
– This removes a key pillar of support for the CAD, increasing USD/CAD upside potential.
## US Dollar Strength Continues
– Despite global risk appetite improving slightly since the March banking turmoil subsided, the US dollar remains resilient, supported by stronger-than-expected US economic data.
– May’s non-farm payrolls surprised to the upside, with 272,000 jobs added
Read more on USD/CAD trading.