USD/CAD: Bullish positioning being reduced ahead of the FOMC this week
|- The latest positioning data is supportive of the Canadian dollar.
- The week ahead's key even will be the FOMC.
USD/CAD is consolidating below the 1.32 area and supported in the 1.3150 regions. The range to start the week has been between 1.3153 and 1.3196.
The Canadian dollar has been closely correlated to how EUR/USD and WTI have been performing since the recent shift at the Federal Reserve.
Indeed, oil prices and the impact on them of a second COVID-19 wave are risk factors.
In energy markets, the Sept 17th JMMC meeting will be in focus.
As we look onto the horizon, we argue that the more positive medium-term outlook for demand, ongoing deep OPEC+ cuts and the willingness to impose strong compliance, along with weak output from the shale patch will ultimately keep the Great Rebalancing ongoing and support higher prices,
analysts at TD Securities argued.
And, while the medium-term outlook contrasts with near-term headwinds, downside risks are mitigated as further weakness may also see an increase in voluntary OPEC+ cuts.
Positioning data supporting CAD's outlook
Meanwhile, CAD has seen broad-based buying among commodity currencies as net short positions dropped back from the recent surge.
On the flipside, funds reverted to selling USD and the greenback is still out of favour from a historical perspective.
Analysts at TD Securities are now more mindful of 1.30 in USDCAD, which has been tested at least three times since 2019.
While we think this will be very notable support,but vulnerable to break as 2021 nears. Barring an October surprise - which we think has been downplayed by FX broadly - CAD is better situated to add longs on crosses according to our positioning dashboard
Looking ahead, eyes on FOMC
The focus is now on the FOMC decision this week, the first following significant changes to its monetary policy framework document and traders will be on the lookout for the anticipated dovishness.
We still expect plenty of dovishness, through the incorporation of AIT in the forward guidance—without specificity—the wording on QE, the tone on the economy, the dot plot, and the press conference.
As for domestic data, the Candian Consumer Price Index will potentially reveal that economic activity for July is shaping up to be stronger than expected.
However, a muted performance for August CPI will keep the BoC pre-occupied with downside risks to the inflation outlook even with some recovery in the headline,
the analysts at TD Securities argued.
USD/CAD levels
In the above analysis, conditions were bullish at the time of publishing, but the risk can be reduced as the position struggles to breakeven and the latest positioning data is CAD supportive.
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