While the focus of the wider market will undoubtedly remain largely on Italy and the ongoing volatility in the bond and stock markets, some FX traders’ focus will momentarily turn away from politics and back to economic fundamentals today. That’s because we have key data coming from the US later on today while the Bank of Canada is also scheduled to make a rate announcement. Thus, the USD/CAD is the one to watch for potential volatility.
First up is the private sector employment from the Automated Data Processing (ADP), at 13:15 BST (08:15 EDT). The ADP report is expected to reveal private employment has risen by 191,000 in May after the economy had added 204,000 new jobs in April and 228,000 the month before. Though the ADP is considered to be a leading indicator of the official US non-farm payroll report – which comes out on Friday – it is worth noting that it does sometimes deviate significantly from the NFP. Nonetheless, the dollar could move sharply should the actual number deviate significantly from expectations. It should be noted however that the focus is not too much on the employment at the moment as it is on inflation. So, for the dollar to move on employment figures, we will need to see a big surprise.
The same could be said about the US first quarter GDP, especially since it will be the second estimate, though for some reason the Bureau of Economic Analysis chooses to call it the 'Preliminary' GDP estimate (with the first estimate being called 'Advance,' in case you were wondering). Anyway, GDP, which will be released at 13:30 GMT (08:30 EDT), is expected to be left unrevised at 2.3% (which by the way is reported in an annualised format i.e. quarterly change x4).
Later on in the day, at 15:00 BST (10:00 EDT), the Bank of Canada will be making its latest rate decision. However it won’t be much of a decision to make as it is widely expected to hold rates unchanged. The central bank has tightened monetary policy three times since the middle of last year, pushing its benchmark rate to 1.25%. But if the rate statement conveys anything hawkish then this may help the Canadian dollar regain some lost ground versus the US dollar. Otherwise, the USD/CAD could push further higher amid the ongoing US dollar rally.
From a technical point of view, the USD/CAD has been putting in a series of higher lows since bottoming out at just above 1.20 back in September of last year. Recently, rates broke above resistance at 1.2920 which caused a breakout above the short-term bearish trend line. However, the Loonie has stalled near 1.3050 and thus ahead of major resistance circa 1.3125-1.3225 range. The 1.3050 level marks the point of origin of the breakdown in mid-March; the lower end of the 1.3125-1.3225 range marks the 61.8% Fibonacci retracement level while the upper end corresponds with the point of origin of the larger breakdown back in June 2017.
With these long-term resistance levels in close proximity, there’s a possibility the USD/CAD could head lower again from here. However, we would only turn bearish if there is a clear break in the market structure – in other words, if we get a lower low now (the last low was at 1.2750). Short-term support comes in at 1.2920.
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