Summary:

For now, it is too early to determine a bearish outlook for the USD despite a slowdown in US inflation, as this has not provided much confidence for an earlier rate cut. The market anticipates that the strength of the USD will remain stable until May 31. In contrast, the continued slowdown in Canadian inflation provides more confidence for a rate cut by the BoC in June, highlighting a clear policy divergence between the Fed and the BoC.

USD/CAD 4H

USD: Markets anticipate that the US dollar could stabilize in the next couple of weeks despite the dovish CPI report. Currently, the fact that inflation remains too high for the Fed to consider cutting rates does not seem to concern market bulls significantly. Neel Kashkari, a known hawk, reiterated his concerns that policy might not be tight enough and that rates will likely be held higher for longer. Additionally, Austan Goolsbee, often dovish, emphasized that more work is needed on disinflation. As a result, the market believes it is premature to conclude that the USD is entering a bearish trend until the core PCE report is released on May 31. Consequently, the attractiveness of carry trades remains undiminished, and the rally in the ultra-low-yielding JPY is unlikely to be sustainable. Moreover, the policy divergence recently between the US and Canada increases the attractiveness of shorting the CAD, especially the Canada April CPI continues to show weakness on Tuesday.

CAD: Currently, the Canadian rate market is anticipating a higher probability of an earlier rate cut from the Bank of Canada (BoC) following the release of April's inflation data. The report revealed that core inflation has surprised to the downside for the fourth consecutive month this year. The average of core CPI measures (trim and median) slowed to an annual rate of 2.8% in April from 3.1% in March. With inflation nearing the BoC's target and the Canadian economy growing below potential, there is room for the BoC to adopt a less restrictive policy. Consequently, MUFG continues to expect the first BoC rate cut at the June policy meeting. Market expectations for a widening policy divergence between the BoC and the Federal Reserve should keep USD/CAD trading in the high 1.3000s in the coming months.

FX View:

DXM: A Tool to Gauge Retail Sentiments

USD/CAD Current Retail Long/Short Position

The DXM shows that 26.8% of traders are bullish, while the remaining 73.2% are bearish, reflecting the predominant retail sentiment. This sentiment offers a contrasting trading opportunity since retail traders tend to consistently lose money in the long term.

Seasonality Analysis: The Historical Movement of the Currencies  

USD Futures’ seasonality movement

The seasonal pattern for the USD suggests bullish momentum in the near term.

CAD Futures’ seasonality movement

The seasonal pattern for the CAD suggests bearish momentum in the near term.

Sources: Prime Market Terminal

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