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The loonie started the week lower as the Memorial Day holiday restrained liquidity and guidance from the US markets. This week promises to be full of trading activity for all major pairs with many key events, but for now it is the calm before the storm.
Loonie’s strength is linked to energy prices, as the currency has a high correlation to the price of crude. WTI oil prices rose on Tuesday, buoyed by the start of the U.S. summer driving season, while Brent fell on rising output in the Middle East, which mostly serves Asian consumers. Oil prices are expected to stay volatile as investors focus on the Organization of the Petroleum Exporting Countries (OPEC) meeting on Thursday in Vienna, although it’s unlikely that an agreement on output will be reached, especially after Iran and Iraq have both suggested that they will continue to increase production.
On the other hand, the greenback held firm on Tuesday, staying near its highest level in two months against a basket of currencies thanks to growing expectation of a U.S. interest rate hike.
The latest spark for dollar bulls came from Federal Reserve Chair Janet Yellen, who on Friday said a rate increase in the coming months “would be appropriate,” if the economy and labour market continued to improve. The minutes of the Federal Open Market Committee (FOMC) meeting in May has triggered a US dollar rally in expectation of an impending rate hike by June.
The dollar’s index against a basket of six major currencies rose to as high as 95.968 on Monday, having jumped 4.4 percent from its 15-1/2-month low hit earlier this month at 91.919. It last stood at 95.79.
Later today at 8:30 am EDT, the top Canadian release will be the monthly GDP data. Trade balance data will be published on Friday, June 3 at 8:30 am EDT. It is expected that GDP may contract after the Canadian economy slowed, despite the impressive growth at the beginning of the year contributing to a strong first quarter. There are valid concerns over the second quarter as most recent manufacturing and export data has softened. The trade balance report on Friday is expected to show a 2.5 billion deficit.
Notably, the headwinds to both currencies may start with the release of employment data in the US, especially US Non-farm Employment Change on Friday. These figures could further validate the Fed’s comments of a June interest rate hike if the pace of jobs recovery is satisfactory.
Fig. USDCAD D1 Technical Chart
After testing the support level at 1.29075 last Thursday, USD/CAD has been inching up lately, currently settling at 1.30508. The bull seems dominant against the bear as indicated by a higher-than-average RSI (14) of 56.80. The pair is expected to resume its steady uptrend. A long position is further supported by the green trend indicator arrow and the SAR band under the price line.
Buy Digital Call Option from 1.29113 to 1.31901 valid until 20:00 June 3, 2016