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USD/CAD: Canadian dollar in anticipation of Friday’s releases


The Canadian dollar, paired with the U.S. currency, strengthened sharply at the end of last year: in just a few days, the loonie strengthened its position by more than 200 points. The USD/CAD pair declined from 1.2830 to 1.2620. However, at the beginning of this year, the bears loosened their grip. This fact allowed the pair’s bulls to rise to the area of the 27th figure, within which they are now trading.

In general, traders cannot determine the direction of further movement, despite the increased intraday volatility. In this regard, yesterday was indicative: during the day, the pair managed to update the local low at 1.2666, and the local high at 1.2765. Despite a 100-point range for intraday trading, the pair actually stayed in place at the bottom of the 27th figure.

All this suggests that traders need additional information feed. In this context, the most important day of the week will be Friday, when key data on labor market growth for both the U.S. and Canada will be released. And according to preliminary forecasts, by the end of the day, the pendulum may swing towards the U.S. currency. Dollar bulls may again take over and resume the upward trend.

If we look at the weekly chart of USD/CAD, we will see that the pair has been within the framework of a stable upward trend for almost two months. In late October to mid-December, the U.S. dollar dominated the pair, demonstrating almost recoilless growth. The main reason is the uncorrelation of the positions of the Fed and the Bank of Canada.

It is noteworthy that in the first half of 2021, the Canadian regulator showed a fighting character, ahead of its southern neighbor in this regard. Firstly, the Central Bank of Canada began to cut QE back in the first half of last year (becoming the first from the G7 Central Bank to start gradually phasing out anti-crisis measures). In October, the regulator announced the early completion of the incentive program. As you know, the U.S. Federal Reserve made a similar decision on the early tapering of QE only a month later – at its November meeting.

Secondly, following the results of the October meeting, Bank of Canada Governor Tiff Macklem, assured journalists that the regulator could raise the rate “earlier than previously expected.” Given the fact that at the same meeting, the regulator moved the timing of the curtailment of incentives, traders then assumed that the Central Bank would decide on this step in the first half of 2022.

Against the background of such events, it is not at all surprising that the Canadian dollar has been appreciating for several months – from July to October, the loonie has strengthened by almost 600 points. The situation changed dramatically in November last year when the Fed decided to take the first step towards normalizing monetary policy. At the same time, many Fed officials have significantly tightened their rhetoric, lobbying for the idea of a double interest rate hike in 2022.

The Bank of Canada, in its turn, at its last meeting disappointed the bears on USD/CAD: the regulator did not force events, taking a wait-and-see attitude and voicing vague wording regarding the prospects for monetary policy. The head of the Canadian Central Bank made it clear that he would not rush to tighten the parameters of monetary policy. In his speech at a press conference, he focused on the existing risks, while highlighting the success of the national economy. It should also be noted that at that time the world had just “got acquainted” with Omicron, which also became a serious risk factor.

This fundamental background allowed buyers of USD/CAD to refresh their annual high in December, reaching 1.2963. However, they did not dare to storm the 30th figure, retreating from the key resistance level. In view of this fact, on the eve of the New Year, traders began to take profits, putting pressure on the pair. As a result, the pair consolidated in the range 1.2660-1.2760.

Friday releases are likely to push the loonie out of this range. Only up or down is an open question. According to preliminary forecasts, the December data on the U.S. labor market will support the U.S. currency. In particular, the unemployment rate should fall to 4.1%. The headline indicator, reflecting the increase in the number of employed in the non-agricultural sector, should also come out at a “decent” level, reflecting the creation of 410,000 jobs. In the manufacturing sector, as well as in the private sector, indicators should similarly demonstrate positive dynamics.

Canadian Nonfarm, in turn, will show a more modest result. At least, preliminary forecasts speak about it. Thus, the unemployment rate in December should rise to 6.1%. This indicator has been declining for 6 months, so even the projected minimal growth will be perceived negatively. The growth rate of the number of employed should reach the level of 24,000. This will be the weakest result since May last year. For comparison: in the previous month (i.e. in November) 155,000 jobs were created.

If the above releases come out at least in line with the forecasts, buyers of USD/CAD will be able to test the resistance level of 1.2800 (the middle line of the Bollinger Bands indicator, which coincides with the Kijun-sen line on the daily chart). If the U.S. Nonfarm Payrolls comes out in the “green” zone, and the Canadian ones, on the contrary, in the “red,” it will be possible to talk about the resumption of the upward trend.

Taking into account the current fundamental background, it is advisable to consider longs when approaching the lower border of the range 1.2660-1.2760. In my opinion, long positions on the USD/CAD pair look more attractive against the background of the Fed’s hawkish position and the vague position of the Bank of Canada. The main targets of the upward price movement are the levels of 1.2760 and 1.2800.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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