Is Fourth Time the Charm for USD/CAD? Bank of Canada - What to Expect

Don't underestimate the power of persistence. Three times this month USD/CAD tested but failed to close above 1.35 and including the move in April, there have been four failures. Clearly this is important resistance for the pair and with the right catalyst 1.35 will break easily. Despite unambiguously positive Canadian data, USD/CAD has been in an uptrend for the last 6 weeks and on the eve of the Bank of Canada's monetary policy announcement investors are positioning for a cautious outlook. If they are right and the central bank ignores the improvements in the labor market and retail sales, the fourth time could be the charm for USD/CAD this month.

According to recent economic reports, the Canadian economy is on fire. April was a record-breaking month for job growth, the housing market is strong and core retail sales saw strong gains last month. Housing, which has been one of the central bank's main concerns also took a turn for the better and manufacturing activity expanded at a faster pace. Inflation eased on a monthly basis but is back at 2% year over year. Two weeks ago, BoC Governor Poloz said housing is benefiting from solid fundamentals and he expects growth to pick up later this year. However that wasn't his attitude at the last monetary policy meeting or even earlier this month.

When the BoC met in April, there was widespread improvement in the economy as well with noticeable upticks in retail sales and trade. However the central bank completely looked past these reports and lowered their economic projections on the assumption that housing and consumption would weaken in the months ahead. They BoC also expressed concerns about global growth and the trade war. Since then, Canada's economy continued to outperform but Sino-US trade relations deteriorated significantly, oil prices are down 10% and stocks peaked. China is Canada's second most important trade partner behind the US and the prospect of weaker growth in both countries poses a big threat to Canada's 6 month outlook.   Canada does not exist in a silo and the BoC could err on the side of caution which could be enough of a disappointment for USD/CAD to close above 1.35 for the first time since early January.

Here's a look at how Canada's economy changed since their last meeting in April:

Canada economy

Meanwhile EUR/USD resumed its slide after responding positively to the EU election results. The main takeaway from the elections in Europe this weekend is that euro skeptic parties did not gain enough votes to disrupt legislative activity but the centrists lost enough seats to cause fragmentation across the region. Despite stronger than expected economic confidence numbers, the outlook for region is grim with business activity weakening. German labor market numbers are scheduled for release tomorrow and according to the PMIs, job growth eased in the manufacturing and service sectors last month. Technically, EUR/USD rejected the 20-day SMA and is now pointing firmly lower. We anticipate another move below 1.1150 and a possible test of the May lows.

Concerns about a leadership battle and the future of Brexit weighed on GBP/USD, which is eyeing a move back down to 1.26. The Australian and New Zealand dollars are struggling to hold onto their gains and USD/JPY is flat. Stronger than expected consumer confidence numbers in US helped to stem the slide in USD/JPY but with yields hitting their lowest levels in 10 months and President Trump saying he's not ready to make a deal with China the risk is to the downside for the pair.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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