USD/CAD: The only way is down to 1.3000, or is it?

• USD/CAD downside favoured on BoC/Fed divergence although that can switch.
• Technically, Funds is headed towards 1.30 the figure although faces strong support and upside favours 1.32 handle Fibo target.

Following a strong start to the week, the Greenback has given background on Tuesday, sliding from 96.88 to a low of 96.60 which has pressured Funds, (USD/CAD), to the downside, extending the daily correction in the overall bearish weekly candlestick move from the late May tops of the upper 1.35's. The price is now stabilising on the 1.31 handle as markets assess the macro backdrop following the weekend's G20, trade cease-fire between Washington and Beijing and indeed, the OPEC+ accord and extended production cuts.

However, oil futures fell on Tuesday, unable to extend the late-Monday gain that followed the news of the nine-month extension while broader economic concerns continue to hang over tightening fundamentals bringing to light again that demand-side fears. While there are hopes of a trade truce between Trump and Xi, as we head into the Federal Reserve this month, there is a particular focus on economic data. The latest data has exposed an underbelly of vulnerabilities for global expansion and much of the trade war damage has already been done with factory activity slowing across much of Europe, Asia and the U.S. in June. 

Fed/BoC divergence driving force could come undone

Commodity currencies, such as the Loonie, (CAD), trade as a proxy to such risk. Yesterday.s move from the Reserve Bank of Australia was also a warning and can be regarded as an insight to how the rest of the population of central bankers might be thinking - including the Bank of Canada. In recent weeks, the BoC dropped its hawkish bias and lowered its projections - We will find out more from them also later this month when they meet to decide on its interest rate. 

Indeed, the global risks have grown and the Bank may well amplify these concerns. However, inflation in Canada is strong with that core measure touching 2.3% in May which was a 10-year high. The headline print also surprised to the upside at 2.4%. Both measures currently fall in the upper half of the BoC inflation-target band. Also, the nation has a strong labour market, low unemployment and there are signs of a housing recovery. For these reasons, and coupled with an easing switch-up from the Fed, the CAD was the strongest G10 currency in June. 

All in all, there are strong arguments for the downside in USD/CAD on a fundamental basis but the risks are that the Federal Reserve holds should U.S. data continue to outpace that of Europe and Asia/Pacific and the BoC shows signs of discontent with global headwinds on the rise.

Analysts at Westpac highlighted the key risks ahead related to Funds:

• BoC may pay little heed to global risks July 10 and could stress growing confidence in the domestic outlook.
• Canada labour market to churn out jobs at a solid rate (Jul 5).
• FOMC minutes and Fed Chair Powell have a strong dovish lean (Jul 10).
• Key data and events
• US Jun non-farm payrolls (Jul 5)
• Canada Jun employment (Jul 5)
• FOMC minutes (Jul 10)
• Fed Chair Powell semi-annual testimony (Jul 10)
• Bank of Canada meeting (Jul 10)

USD/CAD levels

On the technical front, analysts at Westpac warned that "prospects for further USD/CAD declines face tougher technical resistance into 1.3000, the area coinciding with a range of key supports." On the upside, a 23.6% Fibo retracement 18-28 June range has capped recoveries so far, while a break there opens the 1.32 handle and the 38.2% Fibo retracement target.