US 100 Dollar and Canadian 100 Dollar Banknotes - Currency Exchange — Kenneth Cheung

By Zain Vawda

USD/CAD is back at the top end of the wedge pattern, which has confined the pair to a 250-300 pip range since April. The longer price continues to coil in the wedge, history says the breakout will be explosive.

Oil prices continued their slide at the start of the week despite rising Geopolitical tensions. Potential escalation in the Middle East over the weekend has done little to support oil prices. A resurgent US Dollar and weak Canadian Dollar have proved to be the perfect catalyst for a potential rate cut.

WTI OIL Daily Chart, June 22, 2024

The weakness being experienced by the Canadian Dollar can be traced to the expectation of a rate cut this week from the Bank of Canada (BoC). The Bank of Canada is already a front-runner in the rate cut race, but a slew of softening data has added to expectations of another 25 bps cut on Wednesday. This comes as inflation continues to cool and jobs data weakens, which may prompt the BoC into action.

The unemployment rate surged to 6.4 percent in June, while discretionary consumer spending continues to fall. Retail trade data released on Friday revealed a 0.8 percent decline compared to the previous month, with sales dropping in eight of the nine subsectors.

Last month, Bank of Canada Governor Tiff Macklem stated that the country’s economy is on track for a “soft landing.” The bank projects Canada’s economy to grow by 1.5 percent this year, according to its April forecast.

However, the Royal Bank of Canada noted that GDP per capita has declined in six of the past seven quarters. This indicates that the Canadian economy has not been keeping pace with the population surge over the past two years.

The Week Ahead: BoC Rate Meeting, US GDP and PCE

Looking ahead and beside the BoC rate decision, US data begins to heat up on Wednesday as well with the release of the PMI numbers. This will be followed on Thursday by US GDP and Friday, the all-important inflation data via the PCE index.

Source: For all market-moving economic releases and events, see the MarketPulse Economic Calendar.

Technical Analysis

USD/CAD has been coiling inside the wedge pattern since April 2024. Price looks poised for a breakout, which may materialize today with a daily candle close above the 1.37620 handle.

A failure to break above the wedge pattern today could mean some consolidation before another attempt on Wednesday when the BoC meeting takes place.

My concern around a rate cut by the BoC is that the majority of that might be priced in already. Thus, a rate cut may not be enough to facilitate a sustained push above the wedge pattern and a run toward the April high of 1.3846.

Support

Resistance

USD/CAD Daily Chart, July 22, 2024