Summary:

It's too early to conclude that the USD is starting a bearish trend, as recent data isn't enough to provide strong confidence in an imminent rate cut. This week's focus will be on NFP data, with markets anticipating a tight labor market, potentially prompting the Fed to maintain higher rates for longer. Additionally, the upcoming US election poses an upside risk for the USD. Conversely, markets expect the BoC to cut rates this week, given encouraging recent inflation data and a GDP report indicating a need for a rate cut.

USD/CAD 4H

Macro View:

USD: Markets continue to maintain the bullish stance on the USD, driven by confidence in the US economy and concerns about upcoming election risks. They expect the Dollar to move towards the stronger side of its recent range over the next few months and believe a breakout in favor of Dollar strength is likely if new inflationary catalysts, such as tariffs or further fiscal expansion, emerge. This week, markets will focus on Non-farm payrolls and ISM reports to anticipate the FOMC's June decision. Additionally, markets believe that US labor market and business sentiment data will continue to depict a relatively healthy US economy, with a very tight labor market and robust wage growth. This could prompt US rate markets to reassess their Fed expectations, further boosting the USD's rate appeal across the board.

CAD: The Canadian rate market now anticipates a higher probability of an earlier rate cut this week from the BoC following the release of April's inflation data. The report revealed that core inflation surprised to the downside for the fourth consecutive month this year. The average of the core CPI measures (trim & median) slowed further to an annual rate of 2.8% in April from 3.1% in March. With inflation moving closer to the BoC’s target and Canada's economy growing below potential, there is now room for the BoC to make their policy rate less restrictive. As a result, markets expect the first BoC rate cut this week at the June policy meeting.

FX View:

DXM: A Tool to Gauge Retail Sentiments

USD/CAD Current Retail Long/Short Position

The DXM shows that 40% of traders are bullish, while the remaining 60% 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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