USD/CAD Outlook: Stretched trend faces key CPI, Macklem and Waller tests

• USD/CAD bullish trend stretched to pandemic-era extremes
• DXY flashes warning sign after breakout
• Hotter Canadian CPI may test bullish conviction
• Macklem and Waller speeches add intrigue

With Canadian inflation, Bank of Canada Governor Tiff Macklem and Fed Governor Christopher Waller all due to feature over the next 24 hours, USD/CAD enters a potentially pivotal period as we begin the new week.

Trend strong, stretch extreme

Source: TradingView

What really sticks out on the USD/CAD chart is just how strong the bullish trend has been since bottoming in early May, taking out all its key medium and longer-term moving averages before breaking above the swing high set back in March this year at 1.3967. We've then seen an extension of the move through the former double top of 1.4140 that printed in November last year.

While there's absolutely nothing bearish on the chart right now, and the price action and oscillators continue to favour playing it from the long side, you can't help but notice just how stretched the move has become.

RSI (14) sits at 86.7, the most extreme reading seen since March 2020, just before the onset of the pandemic. Then there's the ATR stretch indicator in blue at the bottom of the chart, which currently sits six times above the 50-day moving average. That's also the most extreme reading seen since just before the pandemic.

So while the price action and oscillator signals continue to point higher, the risk is clearly there that we could see a meaningful reversal if given the right catalyst.

That's why watching 1.4140 is important. Will it now flip to offering support, or will price slip back beneath it?

If it's the latter, the risk emerges of a much more substantial unwind of the bullish trend, potentially bringing 1.4024 and 1.3967 into play. If it holds, 1.4300 becomes the level to watch on the topside, having acted as both support and resistance during periods last year.

DXY flashes bearish signal

Source: TradingView

While USD/CAD itself is not showing any obvious signs of rolling over, there are tentative signs elsewhere that the broader US dollar rally may be vulnerable.

On Friday, the DXY printed a shooting star immediately after breaking above resistance. On its own, that's not enough to suggest a reversal is imminent, much like the stretched positioning in USD/CAD doesn't automatically mean the pair is about to turn lower.

However, it does raise an important question: with markets now pricing in 49.5 basis points of Fed tightening by the middle of next year, just how much good news is already reflected in the US dollar?

The Fed has turned more hawkish, rate expectations have repriced aggressively, and the dollar has responded accordingly. What remains unclear is what will fuel the next leg higher.

It's also worth remembering that we're heading into the final full week of the second quarter. With the US dollar having enjoyed a strong run, quarter-end flows may muddy the waters when it comes to interpreting near-term price action.

Thankfully, we may get some more concrete answers over the next 24 hours.

Canadian inflation a non-event or catalyst?

Source: TradingView

There will be no shortage of catalysts, with Canadian inflation data, remarks from Bank of Canada Governor Tiff Macklem and comments from influential Fed Governor Christopher Waller. Of those, Canadian inflation is likely to attract the most immediate attention.

As things stand, consensus forecasts see CPI-median holding at 2.1% and CPI-trim at 2.0%, leaving the average of the Bank of Canada's preferred core inflation measures at 2.05%.

Source: Bank of Canada

That's important because it's broadly in line with the Bank's own forecasts. Back in April, policymakers projected core inflation would average 2.1% in Q2. In other words, if forecasts prove accurate, inflation would be evolving largely as expected.

As such, it really comes down to whether the figures deviate meaningfully from consensus. If it doesn’t, it may prove to be something of a non-event.

However, we've seen Canadian inflation data surprise before. With USD/CAD already extremely stretched, any meaningful deviation, especially on the upside, could prove influential later in the session.

It won't just be markets paying close attention to the report.

Macklem gets the microphone

Bank of Canada Governor Tiff Macklem is due to speak in Paris almost immediately after its release. Given he's speaking in a foreign country, it naturally raises questions as to whether domestic monetary policy will feature prominently in his remarks. However, with fresh data arriving just before he takes the stage, he'll have an opportunity to address the report should he deem it necessary.

With markets continuing to price close to a full 25 basis point Bank of Canada rate hike by year-end, Macklem has an opportunity to either reinforce or push back against those expectations should he choose to.

Will Waller reinforce the message?

The other event worth watching comes from Fed Governor Christopher Waller.

Ahead of the June FOMC meeting, it was Waller who helped put markets on the scent of a more hawkish outcome, warning it would be "crazy" to be talking about rate cuts this year while also arguing the Fed should drop its easing bias.

As a result, his remarks loom as an important test of whether markets have interpreted the Fed's latest message correctly. While investors are now pricing two full hikes by the middle of next year, it's unclear where Waller sits relative to the latest rate projections.

Source: TradingView

Generally viewed as sitting in the middle of the Fed's hawk-dove spectrum, he may provide valuable insight on what the broader FOMC may be thinking. 

Will he reinforce the greater focus on inflation and data dependence outlined by Chair Kevin Warsh following last week's meeting, or will he strike a different tone? If it's the latter, it could raise questions about the degree of consensus within the FOMC at a time when markets have aggressively repriced the US interest rate outlook.