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FX.co ★ USD/CAD. Buy a pair on downward reversals

USD/CAD. Buy a pair on downward reversals

This week, the USD/CAD pair managed to reach the level of 1.2807, a multi-month high. The last time the instrument was in this area was at the end of January this year. And although traders literally left the reached peak on the same day, the upward trend of the USD/CAD has still not lost its relevance.

Considering the last meeting of the Canadian regulator, it can be assumed that the likely uncorrelation of the positions of the Fed and the Bank of Canada will support the buyers of the pair. Therefore, it is advisable to consider the price's downward correction as a reason for opening longs. In general, the Canadian dollar has finally lost the "trump card" that he used for many months. Going back to the April meeting, the Bank of Canada reduced the volume of the asset repurchase program by 1 billion, while the US Fed at that time took an unambiguously dovish position since American inflation did not yet give cause for concern. Therefore, the Canadian dollar had a significant advantage against the US dollar throughout April and almost all of May.

USD/CAD. Buy a pair on downward reversals

Everything changed at the beginning of the summer, after the announcement of the results of the Fed's June meeting. The American regulator has tightened its rhetoric and published an updated point forecast, wherein the interest rate will be raised twice in 2023. But given the surge in US inflation, there is an opinion on the market that the Fed will start tightening monetary policy next year, while it will announce the curtailment of QE (according to some assumptions by the end of this year. Powell will make a corresponding statement in August at an economic symposium in Jackson Hole. In view of such hawkish expectations, the Canadian dollar is forced to follow its US counterpart, determining the upward trend of the USD/CAD pair.

It is worth noting that the results of the last meeting of the BoC members should have supported the Canadian dollar. However, traders trade on the US dollar, opening longs when USD/CAd declines. It can be recalled that the Bank of Canada announced the beginning of curtailing the asset purchase program from $3 billion to $2 billion per week at its July meeting that was held last week. This fact did not have any effect: after a short-term decline, the pair rose again, updating the six-month price maximum this Monday.

In my opinion, this reaction is due to two main factors. First, the next step to curtail QE was widely expected and announced a few months ago. In this case, the regulator could provoke volatility only if it retreated from the forecast scenario (for example, by taking a wait-and-see position). Second, simultaneously with the fact of curtailing QE, the Bank of Canada voiced quite pessimistic words, which actually leveled the optimistic mood of investors regarding the further steps of the Central Bank.

In particular, the Canadian regulator lowered its expectations for economic growth this year. The Central Bank now expects GDP growth of 6.0%, against its previous forecast of 6.5%. At the same time, the Central Bank emphasized that further adjustment of the QE program will be carried out very slowly. The regulator also voiced some concern about the pace of recovery of the labor market. According to the latest data, the component of the number of employees increased only due to the indicator of part-time employment, while the component of full employment was in the negative area (the ratio of +263 thousand/-33 thousand). Tiff Macklem, Governor of the Bank of Canada, said that country still has to restore about half a million jobs. At the same time, he reacted quite calmly to the growth of inflation indicators. In his opinion, the rise in inflation is due to temporary factors – key indicators will exceed the target range of the Central Bank, but these effects should fade by the end of the year since inflation will decrease next year.

Despite the actual "hawkish" decision, the Canadian regulator voiced rather restrained and pessimistic rhetoric, announcing a pause in the issue of curtailing QE. The USD/CAD traders were clearly disappointed with such results of the BoC's July meeting, so the pair surged almost immediately, updating multi-month highs.

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USD/CAD. Buy a pair on downward reversals

From a technical point of view, the situation is as follows. The pair on the daily chart is located between the middle and upper lines of the Bollinger Bands indicator, above the Kumo cloud, but between the Kijun-sen and Tenkan-sen lines. If the pair crosses the Tenkan-sen line (1.2615 mark), the Ichimoku indicator will form a bullish "Line Parade" signal, which indicates the continuation of the upward momentum. In this case, it will be possible to consider longs to the upper line of the Bollinger Bands on the same time frame, which corresponds to the level of 1.2720.

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