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July 8, 2021

USD/CAD Deep Dive: Heading Higher?

Bart Kurek

Check out my previous USDCAD deep dive's here and here to see how we have progressed...

Price has progressed a lot since we did a deep dive on U/C. We can see price has now clearly broken out of the long-term descending channel as we've had great USD strength over the past couple of weeks. This is due to multiple reasons, such as the Fed's hawkish stance on interest rates and a large amount of coronavirus vaccine administrations.

After the initial breakout, we saw price retrace and rejected the channel's top, confirming it as new support in mid-June. Now, we see price test previous key horizontal levels such as 1.238 and 1.258. USD is the base currency in this pair, so we could expect U/C to continue heading higher and retesting previous key levels with continued USD strength.

We can see that price was clearly ranging between 1.2025 and 1.214 until the breakout, then 1.248 was seen as clear resistance until it was clearly broken, and we're now waiting on a retest before we could potentially go long again.

Most traders are currently short on this pair and expecting price to quickly fall back inside the channel and possibly continue the long-term trend. If over the next couple of weeks, we do get continued USD strength from CPI, PPI and GDP data, as well as the FOMC meeting in a few weeks, it's likely we could continue to see U/C continue breaking these previous levels and head higher.

There's a few high-tier economic events coming out over the next couple of weeks such as CPI, PPI, Retail Sales, GDP and the FOMC press conference for the USD. And for the CAD we've got only The BoC coming out with the monetary policy report and rate statement. We've got loads of room for USD strength to come in, and not be overtaken with CAD strength for a while.

Over the next few months, I expect CAD to soften as the recent acceleration in global growth hits a slower inflexion point, domestic growth meets market expectations, and US real yields rise as a Fed taper approaches. Brent is unlikely to rise above $70bbl in the near term, 2y yield differentials no longer exert downward pressure on USD/CAD, and investors are already positioned for CAD strength.

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