Canadian Dollar Forecast: USD/CAD Rallies as DXY Sets Fresh Low

Canadian Dollar, USD/CAD Talking Points:

USD/CAD continues as one of the more attractive major FX pairs for USD-strength scenarios, with USD/CAD working on its fifth consecutive daily gain despite the DXY push to a fresh monthly low.
The big question now is whether USD bears can stretch and markets are already pricing in several rate cuts from the Fed in the coming months and quarters. If USD does continue to show stall like what appeared in the back-half of August, USD/CAD can remain as an attractive venue, and if USD does reverse with the Fed moderating those market expectations, bullish USD/CAD could be quite attractive.

It was another bearish reaction in the US Dollar to a Non-farm Payrolls report and while odds for more rate cuts from the Fed have been pushing higher, USD/CAD is a notable exception amongst USD pairs. I covered this in the Tuesday webinar and then again on Thursday in the video and article looking ahead to NFP, and that bullish structure in USD/CAD remains intact with perhaps even a bit more interest given the fact that the pair has rallied even with DXY falling to a fresh low.

At this point, USD/CAD is working on its fifth consecutive green daily bar – and that follows a key test of support at 1.3750 that showed up last Friday. As investigated in that Tuesday webinar, bulls came in to hold a slightly higher-low with last Friday’s swing, in the same 1.3750 zone that was resistance for the ascending triangle back in Juen and July. That higher-low illustrates bullish anticipation, and that’s since led into a consistent rally this week, even as DXY has been weak in most other major FX markets.

This keeps the pair as one of the more attractive venues to work with USD-strength, whether that’s from a continued stalling near longer-term supports, such as we’ve seen since mid-August, or perhaps even the paring back of rate cut expectations that have hurriedly shot-higher, even with US inflation remaining at well-elevated levels.

USD/CAD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD Structure

The weekly chart highlights that building bullish structure that draws back to Q2, when bears began to stall ahead of the 1.3500 level. The first day of Q3 produced a higher-low, even as the USD set a fresh three-year-low, and that divergence continued in July as prices began to break-higher.

The pair set a fresh three-month-high just ahead of Powell’s speech at Jackson Hole, and as he sounded more dovish than he had at the July FOMC meeting, USD bears got another shot-in-the-arm, with USD/CAD starting yet another pullback.

But that’s what led to the higher-low from the following Friday around the Core PCE release and that’s what’s helped to keep the bullish short-term structure that remains in-play today.

USD/CAD Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist

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