USDCAD Rate Reacts to Uncertainty Surrounding USMCA

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Canadian Dollar Talking Points

USD/CAD gives back the reaction to the dismal ISM Manufacturing survey as House of Representatives SpeakerNancy Pelosi fires warning shots regarding the United States-Mexico-Canada Agreement (USMCA), and little evidence of an imminent trade deal may continue to sway the exchange rate as it puts pressure on the Bank of Canada (BoC) to alter the path for monetary policy.

USDCAD Rate Reacts to Uncertainty Surrounding USMCA

USD/CAD extends the rebound from the weekly-low (1.3206) as Ms. Pelosi argues that trade agreement needs to “have enforceability that will make it real for America’s families and farmers,” and the comments suggest more needs to be done to secure the USMCA even though the Speaker of the House insists that “we are making progress” on the trade deal.

The ongoing shift in US trade policy may force the BoC to change its tune as the Governing Council pledges to “pay particular attention to global developments,” and the central bank may come under pressure to insulate the Canadian economy as the US-China trade war “is weighing more heavily on global economic momentum than the Bank had projected in its July Monetary Policy Report (MPR).”

Nevertheless, the BoC appears to be on track to retain the current policy at its next meeting on October 30 as “Canada’s economy is operating close to potential,” but Governor Stephen Poloz and Co. may adjust the forward guidance for monetary policy as “the Bank expects economic activity to slow in the second half of the year.

With that said, it remains to be seen if the BoC will take a preemptive approach to mitigate the risks surrounding the region, but the central bank may keep the benchmark interest rate at 1.75% throughout the remainder of the year as the economic outlook for the US, Canada’s largest trading partner, “remains solid.”

In turn, headlines surrounding the USMCA may sway USDCAD amid little signs of an imminent trade deal, but the diverging paths for monetary policy may continue to drag on the exchange rate as the Federal Reserve appears to be on track to push the benchmark interest rate towards 1.50% to 1.75% ahead of 2020.

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USD/CAD Rate Daily Chart

Image of USDCAD daily chart

Source: Trading View

  • Keep in mind, the broader outlook for USD/CAD is no longer constructive as it clears the February-low (1.3068), with the break of trendline support fostering a bearish outlook for the exchange rate.
  • At the same time, the rebound from the 2019-low (1.3016) appears to have stalled ahead of the Fibonacci overlap around 1.3410 (38.2% expansion) to 1.3420 (78.6% retracement), but recent developments in the Relative Strength Index (RSI) brings the September-high (1.3383) back on the radar as the oscillator breaks out of the bearish formation carried over from August.
  • As a result, a close above the Fibonacci overlap around 1.3280 (23.6% expansion) to 1.3330 (38.2% retracement) may spur a test of the September-high (1.3383), with the next area of interest coming in around 1.3410 (38.2% expansion) to 1.3420 (78.6% retracement).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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