USD/CAD forecast: Geopolitical risks to flip BoC dovish and weigh on CAD

• USD/CAD trapped between key moving averages but BoC risks to break the barriers down.
• The Federal Reserve risks overshadowed by trade war escalations, WTI likely to weigh on CAD.  

This was the week: 

Traders were braced for the Federal Open Market Committee minutes and Powell's Jackson Hole speech but, by the end of the week, things turned ugly on the trade war front which likely makes for a blood bath in financial and commodity markets for the sessions ahead. While Canadian CPI surprised to the upside, the fact that the Bank of Canada's Poloz was called in by the Senators for a special meeting to discuss trade uncertainties prior to the escalation on Friday just goes to show how the central banks might not be forced into cutting rates sooner than expected in a precaution to imported risks to the economy. Indeed, the price of oil is likely to pressure the Loonie lower. 

Key CAD events:

Canada’s consumer price index was up 0.5% (not seasonally adjusted) in July leaving the year-on-year inflation unchanged at 2.0%, significantly above consensus expectations calling for 1.7%.

Key points noted by analysts at National Bank of Canada:

• In seasonally adjusted terms, CPI was up 0.4% in July as rises in recreation (+0.9%), transportation (+0.6%), food (+0.3%), shelter (+0.2%), healthcare (+0.2%) more than offset declines in household operations (-0.2%) and alcohol/tobacco/cannabis (-0.1%).
•  The Bank of Canada’s preferred core measures on a year on year basis were as follows: 2.1% for CPI-trim (unchanged from June, one tick above consensus), 2.1% for CPI-median (2.2% in June, in line with consensus) and 1.9% for CPIcommon (1.8% in June, one tick above consensus).
•  On a regional basis, the annual headline inflation rate is slightly above the national average in Quebec (+2.2%), Ontario (+2.1%) and British Columbia (+2.1%). Alberta (+1.3%) is below the national average.

Looking ahead next week, Canadian data may well be overshadowed by trade war risks and the risk-off reaction, however, in the background, there will certainly ben a keen interest paid to Gross Domestic Produce and Retail Sales - anything that wanes to the downside will cement action from the BoC which will already be reacting to trade war escalations. 

Key U.S. events:

Dollar bulls remain optimistic following those Consumer Price Index (0.1% above estimates) and solid Retail Sales data earlier in the month. However, this week was all about the Fed with the minutes of the July meeting combined with Powell's speech at Jackson hole which left the door open for a rate cut in September. Powell did not lay out a reaction function regarding the Fed’s rate path beyond September. However, while Powell’s speech was supposed to be the main event of the day, Jackson Hole was overshadowed US-China trade war headlines which indeed cements the prospects of more insurance cuts in the coming months, most likely in September and October. Its a data-heavy week for the Dollar next week, but markets will be digesting the latest escalation to trade wars.

 

 

USD/CAD Technical Analysis

The price remains capped by the 200-day moving average and on attempts above it are finding resistance in the 1.33 handle. The price had been advancing in an ascending channel which was described as too steep in the previous analysis and is indeed starting to run out of steam where price meets the confluence of the 200-DMA and a 23.6% Fibo. If price resumes back to the 38.2% on a break of the 20/50-DMA, (1.3220), a resumption of the downtrend will be back in vogue, targetting the 1.28 handle - 1.3350 is the near-term target to break still on the upside which guards the 1.34 handle and mid-June highs. 

USD/CAD Forecast Poll

The FXStreet forex poll of experts is a sentiment tool that highlights near- and medium-term price expectations from leading market experts and shows a bearish bias for the week ahead.