USD/CAD Price Eases From Multi-Week Top Amid Renewed USD Selling, Jerome Powell's Speech Awaited
- USD/CAD cross catches some bids on Tuesday and extends the sharp pullback from a key resistance zone
- Declining treasury bond yields amid a weaker risk tone undermine the safe-haven greenback
- An uptick in oil prices amid supply concerns underpins the loonie, followed by upbeat Canada macroeconomic data
- Investors await Fed Chair Jerome Powell's speech for hints on future monetary policy decisions
USD/CAD pair witnessed some selling on Tuesday during the early part of the Asian session and extended the sharp pullback from the key resistance zone amid weak USD demand. The cross met fresh supply from the vicinity of the 1.34456 level, dragged spot prices further below the 1.34400 mark, and looks set to maintain its offered tone heading into the European session.
Retreating treasury bond yields amid a weaker risk tone undermined the safe-haven greenback. Apart from this, the prevalent risk-on environment further undermines the safe-haven buck and acts as a tailwind for the risk-sensitive Loonie. This was evident by a general positive around equity markets.
The U.S. Dollar index (DXY), which measures the value of USD against a basket of currencies, was down 0.28% for the week at $103.448 (as per 05:57 UTC+3), extending its modest rebound from the vicinity of 103.764 level/monthly high. The U.S. Dollar had recovered strongly from a nine-month low to hit a monthly high as last week's blockbuster U.S. jobs report raised the likelihood of the U.S. Federal Reserve keeping on with its inflation-fighting interest rate hikes for longer. This, in turn, was seen as a key factor that pushed the treasury bond yields higher and underpinned the greenback.
Investors now expect the U.S. Central Bank to stick to its hawkish stance for longer. CME's Fed Watch tool is currently pricing in a 93.7% likelihood of a 25bps rate hike increase by the Fed to take its target range to 5% in its next monetary policy meeting scheduled for 22nd March. This, in turn, continues to offer some support to the greenback. Apart from this, the worsening US-China relations continue to take a toll on the global risk sentiment after Washington's decision last week to shoot down a Chinese ballon that traversed American airspace. This comes amid concerns about a strong recovery in the Chinese economy and the economic headwinds stemming from the continuous rise in borrowing costs.
Shifting to the Canadian docket, Oil prices rose for a second straight session on Tuesday, driven by optimism about recovering demand in China and concerns over supply shortages following the shutdown of a major export terminal after an earthquake in Turkey. Additionally shutdown of the 535,000-bpd Phase 1 of the Johan Sverdrup oil field in Norway's area of the North Sea was also seen as a major driver of oil prices. That said, the combination of factors was seen as critical factors that underpinned the Loonie and exerted downward pressure on the USD/CAD pair.
Apart from the aforementioned factors, the Loonie also drew support from positive macroeconomic data. According to a Market Economics report released last week, the S&P Global Canada Manufacturing PMI rose to 51 in January 2022 from 49.2 in the previous month. After five months below par, the manufacturing sector returned to growth, underpinned by production and new orders gains. Additionally, a Richard Ivey School of Business report released Monday showed the Canada Ivey PMI had hit an eight-month high in January. The Ivey Purchasing Managers Index in Canada increased to 60.1 in January of 2023 from a revised 49.3 in the prior month and compared with analysts' expectations of 42.3. It was the highest reading since May 2022, as firms expanded their workforce faster (60.5 vs 59.5 in December), while there was a reduction in inventories (52.7 vs 53.9).
As we advance, investors now look forward to the U.S. docket featuring the release of the trade balance data for December 2022, seen lower at 68.5 billion, down from 61.5 Billion in November last year. That said, the main attention remains on the Federal Chair, Jerome Powell's speech slated for release during the late north-american session. Traders will closely follow his speech to get hints regarding future monetary policy decisions. In the meantime, the U.S. bond yields and broader market risk sentiment will continue to influence the U.S. dollar and allow traders to grab some trading opportunities around the USD/CAD pair.
Technical Outlook: USD/CAD Four-Hour Price Chart
From a technical perspective, using a four-hour price chart, the price has extended the sharp rebound from the vicinity of 1.34747 level after a firm rejection from a strong resistance level plotted by a downward trendline extending from mid-January 2023 swing high. On further weakness, the USD/CAD pair faces resistance from the 1.34000 psychological mark ahead of the 50% and 61.8% Fibonacci retracement levels at 1.33698 and 1.33443 levels, respectively. If the price breaches these floors, it would signal the bears to continue pushing down the price and set the stage for a deeper slide.
All the technical indicators are in positive territory, with the RSI (14) level at 58.33 above the signal line, hance portraying a bullish filter. On the other hand, the Moving average convergence divergence (MACD) crossover is also above the signal line, pointing to a bullish sign for price action this week. Still, a move below the RSI (14) signal line followed by a MACD sending a SELL signal would credence to the bearish bias, which is supported by acceptance of the price below the 200 Exponential Moving Average at 1.34275 level.
On the flip side, any subsequent move-up is likely to find some resistance at the supply zone ranging from 1.34438 - 1.34588 levels en route to the key resistance level plotted by a downward trendline extending from mid-January 2023 swing high. Sustained strength beyond these levels has the potential to lift the USD/CAD pair to the 1.35233 resistance level, above which a bout of a short-covering move could push the USD/CAD pair toward the 1.36000 ceilings.
