Currency Pair of the Week USDCAD

Joe Biden will be sworn in as President of the United States in Wednesday, however this is more likely to be a ceremonious event than a market moving event for traders.  There are other events this week that are more likely to influence the US Dollar, one of which is former Fed Chairman Janet Yellen’s confirmation as Treasury Secretary on Tuesday.  Senate members are expected to ask her about the administration’s stance on the US Dollar.  Although Yellen is expected to not be as aggressive as Trump on supporting a weak US Dollar, she is most likely not going return to the days of a strong dollar policy.  Instead, Yellen is likely to consider the G-7 stance, which is that markets will decide the value of exchange rates.  In addition, this week,  global manufacturing and services PMIs will be released for January.  As many of countries in the UK and European Union were in lockdown,  the initial PMI data is expected to be worse than in December.  However, given that the US was not in national lockdown, the US PMI data may be better relative to other county’s data.  This may give a boost to the US Dollar. 

The Bank of Canada (BOC) will meet this week to discuss monetary policy.  Canadian rates currently sit as 0.25% and the current pace of the QE program is at least CAD 4 billion per week.  Although Canada has recently gone through its own bout of lockdowns, housing and manufacturing data have continued to be strong.  However, employment data has been weaker.  Expectations are for the BOC to leave policy unchanged, however there is the outside chance they may lower rates below 0.25%.  In addition,  over the weekend, Joe Biden’s Day 1 initiatives showed that one of these initiatives is to rescind the Keystone XL pipeline permit, which carries oil from Canada’s Alberta region to several US states.  The Obama administration had opposed the pipeline and Biden opposed Trump in 2017 when he issued the permits in 2017.  Canada has yet to respond, however given that the price to the Canadian Dollar is strongly correlated to the price of Crude Oil, this could cause some volatility ahead for the pair.

On a weekly timeframe, USD/CAD has traded from a high in March of 1.4667 to recent lows near 1.2713.  In doing so, price has been in a descending wedge since early fall 2020.  USD/CAD traded down to the 161.8% extension of the move from the lows during the week of August 31^st to the highs during the week of September 21^st.   This level, near 1.2743, confluences with the apex of the descending wedge.  The pair is currently testing the top downward sloping trendline of the descending wedge near 1.2770.  In addition, the weekly correlation coefficient between USD/CAD and crude oil is -0.90.  For reference, a correlation coefficient of -1.00 means that the 2 assets are perfectly negatively correlated and move in opposite directions 100% of the time.  A reading of -0.90 indicates that the negative correlation between the 2 assets is very strong on the weekly timeframe.  If crude oil begins to weaken, that could help push USD/CAD higher above the trendline near 1.2800.  Next resistance is a downward sloping trendline and a series of previous lows near 1.2990. 

Source: Tradingview, City Index

On a shorter 240-minute timeframe, price broke above the top trendline of a downward sloping channel the pair has been in since late November.  If price breaks above recent highs at 1.2840, it would set up a double bottom formation, with a target of 1.3040.  Short-term support is at the downward sloping trendline near 1.2750, horizontal support near 1.2624, and then the double bottom low near 1.2624.

Source: Tradingview, City Index

With Janet Yellen’s confirmation, PMIs, the BOC meeting, and Joes Biden expected to rescind the Keystone XL pipeline permit, there could be some opportunities for volatility in USD/CAD this week. 1.2840 will be key for the pair this week!

Learn more about forex trading opportunities.

The US Dollar has been in a freefall since the coronavirus pandemic began in March 2020.  Two rounds of fiscal stimulus and an abundance of monetary stimulus have kept the printing machines rolling as the new supply is suppressing the value of the US Dollar.  On January 5^th, as discussed in the Week Ahead, there will be elections in the US state of Georgia for 2 Senate seats.  Currently, Republicans hold a 2-seat majority in the Senate.  If both are won by the Democrat candidates, the Senate will be split 50/50.  If any bills voted on by the Senate result is a 50/50 tie, the final vote will be cast by Vice President Kamala Harris.  Therefore, Democrats would control the Senate.  They already have a majority in the House of Representatives.  Having both the House and the Senate would allow Democratic President-elect Joe Biden to have a much easily time passing his agenda, including a fresh round of stimulus.  Watch the election results on Tuesday evening.  If both seats are won by the Democratic candidates, this could push the US Dollar lower.  In addition, on Friday the US will release Non-Farm payroll data for December.  Expectations are for an increase of only 100,000 jobs, the lowest since the pandemic began. This release may also keep the US Dollar suppressed (lower jobs equal more stimulus).  

The Canadian Dollar, on the other hand, has been extremely strong since the beginning of the pandemic.  Although Canada has gone through its own fiscal and monetary stimulus measures, PM Justin Trudeau has done a much better job than its US counterpart at controlling the coronavirus, including lockdown measures over the end of year holidays in Ontario and Quebec.  As such, the BOC will be in a better position to reduce extraordinary monetary stimulus than will the US Fed.  This is helping to add strength to the Canadian Dollar.  Given that Canada is a crude exporting country,  the Canadian Dollar is also highly correlated to the value of Crude Oil. WTI crude has been moving higher since its lows on April 20^th, and the Canadian Dollar is following right along with it.  Canada will also be releasing its jobs data on Friday.  Expectations are for a decrease of 25,000 jobs in December.   The actual difference in job numbers between the US and Canada on Friday could also affect the value of USD/CAD.

As previously mentioned, on a weekly timeframe USD/CAD has been moving lower since the March pandemic high near 1.4667.  The pair is currently trading near its post-pandemic lows near 1.2700 and is forming a descending wedge.  If price breaks higher out of the wedge, the target is a 100% retracement of the wedge, which is near 1.3390.  In addition, also as previously mentioned,  the Canadian Dollar and Crude Oil are highly correlated, therefore USD/CAD are highly inversely correlated.   The correlation coefficient is currently -.87. For reference, a correlation coefficient of -1.00 means that the 2 assets are perfectly inversely correlated and would move in opposite directions on a one to one basis.  Therefore, traders should also be watching crude oil for clues to direction in USD/CAD. 

Source: Tradingview, FOREX.com

On a 240-minute timeframe, USD/CAD gapped open lower on Monday morning’s reopen below the 161.8% Fibonacci extension level from the September 1^st lows to the September 30^th highs, near 1.2707.  In addition, the pair briefly traded below the lows of December 15^th, 2020 at 1.2688.  Monday’s lows are key support.  If price continues below 1.2665, the next support is at the downward sloping trendline on the weekly near 1.2615, then horizontal support near 1.2527, 1.2247, and 1.2061.  Resistance is closer at the gap fill near 1.2752 then horizontal resistance near 1.2820.

Source: Tradingview, FOREX.com

USD/CAD can be in for some volatility this week, depending on the outcome of the elections in Georgia and the payroll reports from both the US and Canada.  In addition, Crude Oil may play a factor in determining the direction of USD/CAD over the longer-term.

Learn more about forex trading opportunities.