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Abstract: The USDCAD rose for the second day in a row and rebounded further from the low point of the year to date. Weak oil prices weakened the CAD and provided support when the USD strengthened moderately. A good rebound in U.S Treasury yields and a weaker risk tone are conducive to the safe-haven USD.

Fundamentals

The USDCAD rebounded moderately from the lowest level since September 2022 on Tuesday and rose for the second consecutive trading day on Tuesday. The spot price kept the tone of bargain-hunting in Asian and European sessions, and now it is trading near the area of 1.3225-1.3230, with an increase of 0.17% in the day.

The price of crude oil is still depressed because of fears that the global economic slowdown, especially in China, will weaken energy demand. This, in turn, weakened the commodity-linked CAD, and the moderate strength of the USD boosted the asset.

The Bank of Canada (BOC) raised interest rates by 25 basis points to 4.75% the week before the Fed chose not to raise interest rates because people were increasingly worried that the inflation rate might stay above 2%. This move is a bit surprising because the market had expected to keep interest rates unchanged or raise them by 25 basis points.

The BOC said that the excess demand seems to be more persistent than expected, and they will evaluate the upcoming data, but they are firm in curbing inflation. Raising the interest rate to 4.75% is the first time the bank has raised interest rates since January this year, which has brought the interest rate in Canada to the highest level in 22 years. After the news was announced, the USDCAD plunged, and it is still at its lowest level since September last year.

Although the Federal Reserve did not raise interest rates last week, it said that borrowing costs may still need to rise by 50 basis points by the end of this year. The market responded quickly, and now it is priced to raise interest rates by 25 basis points again at the FOMC meeting in July, which in turn triggered a new round of rise in U.S. Treasury yields, which is favorable for the USD.

Last week, after the USD plunged, it is expected that the USD will recover this week. We believe that the relative growth prospects between the U.S. and Canada are conducive to higher cross-cutting. The balance of risk for USDCAD is skewed to the upside from (the lowest level since September) here. However, such a recovery would be corrective and would not evolve into a trend up.

Technical Analysis

After the USDCAD fell sharply to a nine-month low of 1.3178 last Thursday, the selling pressure slowed down this week. The RSI and stochastic oscillator are near oversold levels, indicating a consolidation or upside reversal, but they have not yet changed direction to the upside. A decline in the MACD also reflects subdued market sentiment. (It could still continue to fall.)

It is worth noting that the 50-day and 200-day SMAs are in a death cross for the first time since August 2020. The 20-day SMA is also below the longer-term SMA, suggesting that the market is still in the process of absorbing the previous deterioration in momentum.

Therefore, if the 1.3200 bottom proves to be still fragile, bearish sentiment could extend to the threshold of 1.3135 and then revert to the 1.3075-1.3028 range, which is the 38.2% Fibonacci retracement of the 1.4667-1.2007 downside. And the 1.2952 low from mid-September last year could be the next target.

On the bright side, if the price breaks through the limit range of 1.3225 from July to November, the bulls may re-examine the almost flat downtrend line and the 50% Fibonacci retracement of 1.3340. The bulls need to decisively close above the trend line to generate new buying interest. Another victory for the bulls from here may clear the way to the strong resistance level of 1.35700.

Overall, although the downtrend remains in place, the bears need to wait for a confirmation signal below the psychological barrier of 1.3200 before they can follow through. However, the bears do not have an advantage right now. It is recommended to buy the dips.

Trading Recommendations

Trading direction: Long

Entry price: 1.3222

Target price: 1.3500

Stop loss: 1.3100

Deadline: 2022-07-04 23:55:00

Support: 1.3200, 1.3178, 1.3097

Resistance: 1.3263, 1.3350, 1.3404