Summary:

The Fed kept rates unchanged, raised its inflation outlook, and signaled one rate cut in 2024, potentially boosting the USD as expectations adjust. The BoC's rate cut and weak jobs report disadvantage the CAD. A hawkish Fed may push USD/CAD to 1.38-1.40, but stretched CAD short positions might limit rises.

USD/CAD 4H

Macro View:

USD: In June, the Federal Reserve kept interest rates unchanged but raised its inflation outlook while maintaining its growth outlook. Consequently, the Fed revised its rate outlook, with the updated dot plot indicating only one rate cut in 2024, a more hawkish stance compared to the May meeting. Chair Powell emphasized that the Federal Open Market Committee (FOMC) is not yet ready to cut rates, despite welcoming the softer-than-expected CPI data for May. He stressed that the Fed is data-dependent and wants more evidence of inflation deceleration before easing policy. Since US rate market expectations have not fully aligned with the updated Fed dot plot, the USD could benefit as rate cut expectations are adjusted further.

CAD: While the Bank of Canada's (BoC) first rate cut earlier this month was insufficient to trigger lasting CAD underperformance, a weaker Canadian jobs report for May compared to the US led to further widening in rate differentials, disadvantaging the CAD. This divergence was reinforced by the more hawkish June FOMC outcome, which could push USD/CAD towards the peaks seen between 1.38 and 1.40 over the past 18 months. Despite this, the stretched short positioning in CAD might prevent a sharp rise in spot prices, as no significant relief is expected from energy prices or the BoC.

FX View:

DXM: A Tool to Gauge Retail Sentiments

USD/CAD Current Retail Long/Short Position

The DXM shows that 41% of traders are bullish, while the remaining 59% 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 bullish momentum in the near term.

Sources: Prime Market Terminal

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