The US dollar is set for an important week against the Canadian dollar as traders look to the Bank of Canada interest rate decision for direction. The USDCAD pair broke its two-week losing streak last week, due to a rebound in the greenback and a minor reversal in oil prices.
After three months of heavy losses the USDCAD pair certainly has scope to correct to the upside. The USDCAD pair has lost over 800 points since the start of October last year and is down by around 2,000 points from its 2020 trading high.
Some economists are predicting that the Bank of Canada could cut interest rates this week, following negative monthly jobs data and a rise in COVID-19 infections. In-line with other global central banks, the Bank of Canada may consider bringing rates closer to zero to stave-off the current economic downturn.
Calls for a rate cut may be premature though, as December retail sales in Canada surprised to the upside, and the continued rise in oil prices ais seen as being bullish for the Canadian economy.
The decision from the central bank today really depends how reactionary central bank head Tiff Macklem wants to be in target economic weakness. Vaccines have also arrived earlier than expected, which could provide some support for the Canadian economy if the ongoing lockdown period is reduced.
With inflation remaining low, it would be an aggressive move to cut rates. Speaking of inflation, today we see the Canadian CPI inflation measure released prior to the rate decision. All bets of a rate cut could be pulled back if CPI comes in hot.
The Canadian dollar is also very strong against the US dollar. This gives the central bank plenty of scope to mention that the USDCAD exchange rate is stronger than they would like. The central bank has recently acknowledged the strength of the Canadian dollar against the greenback.
A potent combination of weakening oil prices and a rising US dollar would be required for the USDCAD pair to stage a meaningful reversal. The problem for the Canadian dollar at the moment is that oil prices are still strong, and a reversal has yet to be confirmed in the US dollar index.
USDCAD Sentiment Analysis
Market sentiment data on the ActivTrader platform currently shows that some 75 percent of traders are bullish towards the USDCAD right now. This is edging towards an extreme reading and indicates that the crowd is still heavily buying into dips.
Source by ActivTrader.
Typically, such a one-sided sentiment skew is not good for the prospects of a pending upside reversal. However, it does mean that USDCAD pair will not eventually move higher, it could simply mean that it could be delayed, and weakness may persists in the short-term.
USDCAD Short-term Technical Analysis
The USDCAD pair is still posting bearish lower lows and lower highs across the lower time frames, meaning that a bearish technical bias is still in play in the short-term.
Bulls need to move the price above the 1.2800 level to break this negative price sequence. A bullish falling wedge pattern is also visible across the lower time frames, which suggests that a bullish reversal could take place.
Source by ActivTrader.
According to the size of the pattern the USDCAD pair could rally by around 300 points if a bullish breakout from the channel takes place. If buyers can stabilize price above the 1.2780 level then an upside channel breakout will take place.
Failure to force a bullish channel breakout then the USDCAD pair is at risk of sinking back towards the bottom of the price channel, which is currently located around the 1.2550 area.