USD/CAD headed for a test and break of a key 38.2% Fibo level around 1.3040

USD/CAD has been whipsawed in the month of July, moving into a wide range of consolidation while investors weigh up the outlook for a potential new easing cycle in both the U.S. and Canada.  However, Funds, (USD/CAD), has been lower in the consensus in the market that the Fed will cut rates before the Bank of Canada. Today, we had both central banks competing for the market's attention, with Federal Reserve's Chairman, Powell, testifying at Congress, followed by the FOMC Minutes of June's meeting. Prior to these events, The Bank of Canada held its policy meeting whereby, and as widely expected, they left the policy rate on hold at 1.75%.

However, optimism remains higher than where it was before April of this year where the BoC was dovish. In July’s meeting, relative optimism as to the health of the domestic economy and support to households from declining longer-term mortgage rates and a ‘healthy labor market’ was offset by uncertainties in the form of trade and other dovish central banks. The Bank maintained a data-watch stance. In contrast, both Powell and the FOMC minutes were dovish. 

The markets have factored in a 25bp cut from the Fed for this month - OIS forward pricing for a July rate cut has increased from 25bp to 31bp. if there is a huge downside shock in this week's US Consumer Price Index data, then there will be a chance of a deeper cut of 50bp as insurance against lower inflation.

Powell's testimony

"First, he restated the FOMC’s view from the June meeting that the Fed would ‘act as appropriate to sustain the expansion’, and that ‘the case for a somewhat more accommodative monetary policy had strengthened’ for ‘many’ FOMC members. He added that ‘since then (…) it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook’.

As well as reiterating that ‘inflation pressures remain muted’, meanwhile, he gave this a further dovish twist by saying ‘there is a risk that weak inflation will be even more persistent than we currently anticipate’. "

-  Bill Diviney, a Senior Economist, at ABN Amro

FOMC Minutes and key points

Meanwhile, we have had the release of the FOMC minutes. Prior to the Minutes, US Treasury yields were some 5bp lower and OIS forward pricing for a July rate cut has increased from 25bp to 31bp. The question is whether there will be a 50bp cut of which the Minutes may have given some further clarification tot he Fed's intentions. The DXY was down -0.42% into the Minutes with a low of 97.06 and was flat immediately after the release.

The minutes have essential repeated what Powell already said in his testimony earlier today.

• A rate is warranted in the near term.
• Could be appropriate if incoming data showed continued deterioration.
• Growth and inflation risks are now weighted to the downside. 

• Many Fed officials saw stronger rate cut case of mid-rising risks.
• Many Fed officials in June saw risks weighted to the downside.
• No decision was taken at the June FOMC on standing repo facility.
• Several officials didn't yet see a strong rate cut case.
• Many officials sought more Fed accommodation warranted near-term.
• A few Fed officials saw rate cut risking financial imbalances.
• Several officials sought near term cut as a cushion for shocks.
• Many saw inflation expectations inconsistent with 2% goal.
• Only a couple of Fed policymakers favoured cutting interest rates at June meeting.
• Many participants said growth and inflation risks had shifted notably in the weeks ahead of the meeting and were now weighted to the downside.
• Officials focused on global risks and discussed at some length salt business investment data from the 2nd quarter.

The oil factor

Oil prices are also rising, of which USD/CAD has a negative correlation while the Loonie finds support from higher oil prices. "The latest rise in prices comes on the back of reports that the US considering letting Venezuelan waivers expire for Chevron and other US companies, which would significantly hasten the deterioration in Venezuelan crude production, which is already some 1.6m bpd below its June 2015 levels," analysts at TD Securities explained, adding, that further supporting prices are the "boiling tensions with Iran, which continue to rise as Rouhani considers 'consequences' for the UK's decision to seize an Iranian oil tanker". 

"We continue to suspect that the combination of continued OPEC+ supply discipline, lower US inventories, Libyan and Venezuelan production risks, along with boiling Iran-tensions will all help to lift crude higher, even as demand expectations moderate somewhat. For momentum followers, trends are weak."

USD/CAD levels

USD/CAD has been testing the 38.2% Fibo retracement of the Sep'2017-Dec 2018 range located at 1.3040. A break there opens the case for a run towards 1.2920, a key prior support and resistance level.