USD/CAD: Correction higher to face resistance at 1.2460 – DBS Bank

The loonie is the best performing G-10 currency year-to-date, currently placing a 5.5% gain. The recent Bank of Canada decision to taper has seen USD/CAD drop to a 1.2046 low. On the weekly charts, USD/CAD is moving towards oversold readings. This may allow a contrarian USD bounce, as bearish momentum drains. Nonetheless, the 55-day moving average (currently at 1.2460) remains a price obstacle, Benjamin Wong, Strategist at DBS bank, reports.

1.2802 is a big resistance level to surmount

“Eventually, all would boil down to fundamentals, if we adjudge Bank of Canada Governor Tiff Macklem’s comments uttered last Thursday. While Macklem argued recent CAD appreciation reflected in part higher commodity gains, he was quick to point out continued gains would jeopardise the BoC’s most recent forecasts which assumed a 1.25 rate. In any case, any sustained USD rally still looks miles away with the key 40-week moving averages at 1.2802. Until such levels are crossed, the inherent big picture trend stays CAD friendly.”

“The Overnight Indexed Swap (OIS) market currently anticipates that the BoC would stage three 25 bps rate hikes over the next two years – this keeps the CAD 2Y government bond yield over its US equivalent ratio stepping higher. Currently this spread stands at 0.733%, and this keeps the broader outlook still pretty much alive with scope for 1.1920 (a significant low that traded in May 2015) or even a full throttled 1.618% Fibonacci extension of the move down from 1.2881 (late January highs) that trickles down to 1.1816.”

“Corrective USD strength, however, has to navigate past 55-DMA at 1.2460 which axes right into the dropped-down resistance line from 1.4265.”