Title: Canadian Dollar Outlook: USD/CAD Breaks to Cycle Highs Amid Mixed Macro Drivers
By: James Stanley (original publication on ForexFactory)
The Canadian dollar continues to experience headwinds as the US dollar gains strength, driving the USD/CAD currency pair to fresh cycle highs. On June 11, USD/CAD broke out above its near-term range after weeks of consolidation, signaling a shift in momentum and reinforcing bullish sentiments in the market. This move was largely fueled by contrasting economic data and policy signals from the Bank of Canada (BoC) and the Federal Reserve (Fed), creating a compelling divergence that traders and analysts are taking note of.
In this article, we’ll explore the technical landscape and macroeconomic factors pushing USD/CAD to new short-term highs, analyze what it means for the Canadian dollar, and consider future scenarios based on central bank paths and economic indicators.
Key Highlights:
– USD/CAD recently surged to a fresh high not seen since November 2023
– The breakout follows a long period of consolidation, with traders waiting on macroeconomic clarity
– Divergence in monetary policy outlooks between the BoC and the Fed is one of the central drivers
– Crude oil prices, inflation readings, and employment figures continue to shape the CAD narrative
Technical Breakout in USD/CAD
The technical setup for USD/CAD saw a shift on June 11, as price action cleanly broke above previous resistance at the 1.3750 handle. This area had served as a cap for several weeks, trapping price action in a relatively narrow band and suggesting indecision among traders.
The breakout came after a strong daily candle closed firmly above the range high, indicating a likely continuation of upward momentum. Market participants had been monitoring the wedge formation—a common technical pattern characterized by higher lows and flat highs—anticipating that the pair would eventually resolve directionally.
– Resistance zones breached:
– 1.3750: Key breakout level
– 1.3800: Psychological round number
– Current momentum points toward the next resistance targets:
– 1.3850: Local resistance from late 2023
– 1.3900: Multi-month high and psychological marker
Indicators such as Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are both flashing bullish signals, suggesting that the momentum has room to run, at least in the short-term.
Macro Divergence between BoC and Fed Policy
From a fundamental standpoint, one of the most impactful developments in recent weeks has been the divergence between the Bank of Canada and the U.S. Federal Reserve. The BoC initiated a rate cut in early June, lowering its benchmark interest rate by 25 basis points to 4.75 percent. This marked the first rate cut among the G7 economies in this cycle, signaling a shift in Canada’s monetary direction.
In contrast, the Fed has remained firm in its hawkish stance. Although U.S. inflation has moderated slightly in recent months, policymakers have emphasized the need for further evidence that inflation is sustainably moving toward the 2 percent target before initiating any rate cuts.
– Key contrasts in policy outlook:
– Bank of Canada: Started easing cycle with a rate cut, citing cooling of core inflation and wage pressures
– U.S. Federal Reserve: Holding policy steady; markets expect only two rate cuts in 2024, down from previous expectations of three to four
– Bond markets reflect this divergence:
– Canadian 10-year yield slipped below 3.4 percent, narrowing its spread with the U.S. equivalent
– U.S. 10-year yield remains above 4.3 percent, maintaining a supportive backdrop for USD strength
This policy divergence puts downward pressure on the Canadian dollar, supporting the upside in USD/CAD as capital flows shift into higher-yielding U.S. assets.
Impact of Crude Oil on the Canadian Dollar
Crude oil has
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