USD/CAD has been climbing North since mid-July this summer. However, the Loonie’s pace of decline, especially compared to other commodity currencies such as the Aussie and Kiwi, left many questions about the sustainability of the recent trend. What’s more, the first week of the busy Autumn season showed that things have changed on the fundamental front, and USD/CAD erased half of the recent gains. Currency speculators across the globe wonder if a new downtrend started for the pair, how long will it last and how deep the pair can drop. This article is aimed to provide an in-depth fundamental and technical research for USD/CAD in the medium-term perspective. 

First things first, and lots of things will depend on the overall demand for the greenback, as well as the general risk appetite in the financial markets. So far, the market seems to have fully included a 25 basis points rate cut by the U.S. Federal Reserve in September. However, analysts noted that some of the FOMC voters express indecisiveness in terms of whether another stimulus step is needed for the U.S. economy. Despite, U.S. President Donald Trump’s pressure on the Committee, requiring a softer monetary policy, Fed fund futures are pricing in an 85% chance for additional ease of financial conditions by the end of 2019. Looking back at the market’s reaction to the latest Powell’s speech, global investors comprehended the promise to provide more stimulus as supportive for high-yield assets including equities. U.S. stock indices rallied on the back of the risk-on sentiment, leading the gains among other high-yield sectors including emerging markets. Such carry-trade flows could soften the greenback versus major currencies, weighing on USD/CAD as well.

Another important update came from the employment data this past week. The U.S. labour market showed a cool figure of 130K new jobs created in August. Although average hourly earnings accelerated the growth to +0.4% compared to +0.3% widely anticipated, which was the best performance in the last 6 months, the market’s reaction was rather limited and equities halted the rally last Friday. There is an assumption that the market might overestimate the Fed’s dovishness in terms of too many rate cuts and monetary stimulus provided this year. A 25bp rate cut in September with much more hawkish statement than some equity investors expect could not be excluded completely. Consumer inflation is an important part of the equation for the Federal Reserve in terms of making interest rates decision, however, it might not change the overall picture. 

In contrast, the Canadian labour market kept surprising investors. According to the latest report, the country created more than 81K jobs, while economists were expecting the figure to come in at around 20K. Such an impressive employment growth was the second-largest monthly achievement this year. What’s more, the mix between part- and full-time jobs was robust, participation rate (65.8%) was sustainable, while the unemployment rate remained steady. Although there were concerns about a possible negative impact from trade wars on the Canadian economy, reports show decent and stable growth in employment, wages and thus spending. Comparatively low mortgage rates together with increasing income add pressure on the housing market in Canada, which is traditionally monitored by BoC officials closely.

Comparing the Bank of Canada’s rhetoric versus the Federal Reserve, it’s worth having a look at the latest economic reports. For instance, Ivery PMI improved (60.6 vs 54.2), GDP growth accelerated (+0.2% month over month and +3.7% year over year), Current account narrowed the negative surplus (-6.4B from -16.6B), Wholesale Sales and Core Retail Sales jumped (+0.6% and +0.9% compared to -1.9% and -0.4%, respectively). And what’s even more important for the Bank of Canada, the inflationary pressure increased as the Consumer Price Index grew to 2.0% year-over-year in July. 
In the last press conference following the BoC meeting and rate decision, Governor Poloz stated that the “current degree of monetary policy stimulus” is appropriate. In simple words, that means no rate cut shortly. If the economy continued performing in the same manner, accelerating the growth pace and increasing inflationary pressure, the Bank of Canada would have nothing to do but tighten the monetary policy, increasing the differential with other countries and narrowing it with the United States. Currently, BoC has the highest level of interest rates among all major economies excluding the U.S. 

Meantime, the price of WIT Crude Oil, which has a direct impact on the Loonie’s exchange rate, seems to have found a local bottom. The global consumption might not drop as dramatically as some of the oil bears have been expecting. Saudi Arabia, one of the largest oil producers, added optimism to oil bulls after announcing a new energy minister as a step to work on optimising supply and lifting the price of oil. Technically speaking, WTI Crude oil price breached a descending channel and charted a series of lower lows and higher highs recently, which should signal the start of a new uptrend in the short-term perspective at least. The price level of $60.00 per barrel is still a tough nut to crack for the bulls, but once breached, the uptrend might accelerate, especially in the light of the overall risk-on sentiment in the financial markets. A higher oil price would weigh on USD/CAD.

The current technical sentiment is in favour of a deeper bearish action toward 1.31 or even 1.30 handle. The daily chart below shows a clear bearish divergence on the Commodity Channel Index (21-days period) and Relative Strength Index (13-days period). Although CCI entered the oversold territory, the divergence was not played out yet as RSI has more room to go South. Daily close rates breached the 55-days simple moving average for the first time since August 6, which is also a bearish sign. The nearest target for the bears is the horizontal static support line charted with the lowest daily close rate on July 18. Given the recent momentum, USD/CAD should get there sooner rather than later. 

Concluding all observations described above, the fundamental and technical analysis points to a softer rate for USD/CAD in the medium-term. Those traders 
who managed to enter the market with fresh short positions this past week should keep holding USD/CAD in their portfolios. Risk factors for a possible bullish bounce include a strong resistance near the psychological round-figure support of 1.3000 as many buy-postponed orders by real-money accounts and currency speculators are placed there. Another potential fundamental influence might come from increased trade-war tensions and global economic growth concerns as such fears could weigh on the general risk appetite, supporting capital flows to safe-haven assets. Last but not least, the Federal Reserve’s meeting, rate decision and economic statement could have a significant impact on the greenback’s demand across the board in September, and USD/CAD would not be an exception.