Canadian Dollar Outlook: USD/CAD Bears Test Key Trendline

The Canadian dollar remains under pressure as traders grapple with mixed signals from inflation data and central bank expectations. USD/CAD bears are testing a key trendline, while rising inflation could prompt the Bank of Canada (BOC) to hold rates steady at its upcoming policy meeting. This mix of technical and macro factors leaves the Canadian dollar at a crucial juncture.

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Rising Inflation May Lead Bank of Canada (BOC) to Hold Rates Steady Next Week

It now seems unlikely that the Bank of Canada (BOC) will cut rates next week, given the recent uptick in inflation. While a drop in energy prices helped headline inflation slow to 1.7% year-on-year in April, the BOC’s preferred measures of inflation actually rose. Moreover, median CPI at 3.2% year-on-year and trimmed mean at 3.1% place these key measures above the BOC’s 1–3% target band.

The April statement highlighted the uncertainty surrounding the trade war and its impact on the economy and inflation. With rates at 2.75% following six cuts totalling a reduction of 225 basis points this cycle, the BOC may not feel compelled to provide an overly dovish statement either. Instead, they are likely to reiterate the uncertainties they face—which could keep the Canadian dollar supported.

CAD/USD Positioning: Canadian Dollar Futures – Weekly COT Report

Regardless, traders have been betting against the Canadian dollar, with futures traders increasing their net-short exposure. Asset managers and large speculators increased their gross-short exposure to CAD by a combined 33.4k contracts last week and trimmed longs by 2.4k contracts. However, I suspect many of these positions may have been reversed, given the strong rally in Canadian dollar prices on Friday, fuelled by a weaker US dollar.

It’s worth noting that Canadian dollar futures are also testing trendline resistance. Should the US dollar continue to weaken and the BOC deliver the expected ‘data-dependent’ hold next week, a bullish breakout in CAD futures appears likely.

USD/CAD Technical Analysis: US Dollar vs Canadian Dollar

I have zoomed out to admire the broader view but also to highlight the significance of the bullish trendline that prices are currently testing. As suggested above, I suspect we’ll see a stronger Canadian dollar in due course—implying a lower USD/CAD. A break below trend support would bring the 1.35 handle into focus, with the October low at 1.342 nearby also presenting a viable downside target for bears.

However, with trend support holding for now, bears may prefer to wait for a corrective bounce to fade into. The zoomed-in daily chart on the right also reveals that the daily Relative Strength Index (RSI 2) is heavily oversold, and a small bullish hammer formed on Monday during light trading. The 1.38 handle appears achievable for bulls over the near term, though bears might wait to see if a swing high forms beneath or around the 1.3858 volume point of control (VPOC) before initiating shorts, in anticipation of a bearish breakout.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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