USD CAD still pressured ahead of Bank of Canada FOMC minutes OPEC

Within the past week, USD/CAD has broken down below two major support levels – 1.3600 and 1.3500 – as well as its 50-day moving average. In the process, the currency pair has moved further down within a key parallel uptrend channel that has been in place since the beginning of the year. The bottom of this channel is currently situated around the 1.3400 level, which is the most important support level to watch ahead of some key events that should affect USD/CAD significantly in the next two days.

Wednesday brings a slew of USD/CAD-relevant data. First will be the Bank of Canada’s (BoC) rate decision and statement. The BoC is expected to keep its overnight interest rate unchanged at 0.50%, as it has been for nearly two years. In its previous meeting in April, the BoC struck a relatively hawkish tone as it kept rates steady. Any hints on Wednesday of continued hawkishness could increase speculation regarding a potential future rate hike, which should give the Canadian dollar a further boost.

Also on Wednesday, on the US side, will be the release of minutes from the most recent FOMC meeting in early May. In that meeting, the Fed kept interest rates unchanged, but sounded rather hawkishly optimistic about the US economy. Since that meeting, much has changed and political concerns have increased sharply in the US, helping to place heavy pressure on the US dollar, but Wednesday’s FOMC minutes should nevertheless provide some more clues as to how the Fed sees the US economy and monetary policy evolve going forward.

Finally on Wednesday, official weekly data on US crude oil inventories will be released, which could help to move the energy-linked Canadian dollar. The past several weeks have seen varying magnitudes of inventory draws (as opposed to builds). For last week, another inventory draw is expected, this time at around -2.4 million barrels. The recent contraction in US inventories bodes well for crude oil prices (and the Canadian dollar) in the short-term, and this has helped spark a sharp relief rally since early May.

More directly contributing to this recent rise in oil prices, however, has been heavy speculation over an extension of the OPEC-led output deal among major oil-producing nations. A key meeting of OPEC members will take place in Vienna on Thursday. It is widely expected that the meeting will result in an extension of the current OPEC-led agreement limiting crude oil production. Last week, crude oil prices surged, boosting the Canadian dollar with it, after officials from Saudi Arabia and Russia agreed in principle to extend oil production cuts. Despite the ever-present threat of rising US oil production, any actual agreement to extend the OPEC-led cuts on Thursday should result in a further short-term boost for crude oil prices, which could provide fuel for a further Canadian dollar rebound and USD/CAD fall.

As previously noted, the technical perspective is rather clear. USD/CAD is currently trading in a short-term pullback within a longer-term bullish trend. Of course, the current uptrend channel could breakdown if USD/CAD continues to fall much further. At the current time, however, the bottom of the channel, now around the 1.3400 support level, should continue to provide strong support for USD/CAD going forward. If this support continues to hold, depending on impending economic events and releases, a short-term bounce could see USD/CAD reach back up towards the 1.3600 resistance level. On any potential breakdown below the noted uptrend channel, however, bearish momentum could see the currency pair fall further towards the 1.3200 support level.