Summary:

A robust May jobs report prompted the Fed to hold rates this week. Markets anticipate a hawkish meeting, expecting the Fed to continue signaling concerns about inflation and a tight labor market. In contrast, The BoC signaled that if inflation continues to ease and confidence grows that inflation is heading sustainably toward the 2% target, further rate cuts can be expected. If Fed this on hold this week, there will be a clear policy divergence between Fed and BoC.

USD/CAD 4H

Macro View:

USD: Markets remain bullish on the USD as the upcoming US election begins to have a larger impact, adding a barrier against a significant drop in the Dollar over the next few months. Additionally, protectionist or inflationary policies present an upside risk to the Dollar and contribute to market uncertainty. The May jobs report showed a tight labor market, with nonfarm payrolls surging to 272K and Average Hourly Earnings (AHE) rising by 4.1% year-over-year and 0.4% month-over-month. These figures indicate a tight job market, and the higher AHE suggests an increased risk of inflation. Consequently, the May jobs report could lead the FOMC to hold rates steady this week, potentially maintaining higher rates for longer due to concerns about balancing the labor market and achieving the 2% inflation target. Overall, the market believes it will be difficult for the Dollar to break to the downside before election uncertainty clears, confidence grows in the global outlook, and concerns about a tight labor market and potential inflation risk are addressed.

CAD: As expected, the Bank of Canada (BoC) cut the rate to 4.75% in the June meeting. The BoC signaled that if inflation continues to ease and confidence grows that inflation is heading sustainably toward the 2% target, further rate cuts can be expected. However, Governor Macklem cautioned that lowering the policy rate too quickly could jeopardize inflation progress, indicating that the next cut is more likely in September, though a cut in July can't be ruled out if underlying inflation pressures ease further. The BoC’s decision to start its rate cut cycle ahead of the Federal Reserve, which appears unlikely to cut rates until September unless there is a sharp slowdown in employment growth, has opened up a window of widening policy divergence in the near term.

Keep in mind that the US May CPI report will be released today at 20:30 (GMT+8), followed by the FOMC meeting tomorrow at 2:00 (GMT+8). The meeting will focus on three dimensions: the dot plot, the statement, and Powell’s press conference.

• Dot Plot: The key question is whether the dot plot will show a reduction of 2 cuts or 1 cut this year compared to the 3 cuts projected in March. A decrease in cuts would signal a hawkish stance.
• Monetary Statement: If the Fed revises its inflation forecast upward in the June statement, it will indicate uncertainty about the future inflation outlook, leading to a more hawkish tone.
• Powell’s Press Conference: Given the recent robust job report and persistent inflation, attention will be on Powell’s economic outlook for the near term and his projections for rate cuts in 2024. His tone will be crucial and closely watched by the markets.

Before the FOMC meeting, the May CPI report will be released. The majority consensus is bullish on May inflation. However, unless the CPI report is significantly lower than expected, a slight decrease in May CPI might not significantly impact the FOMC meeting's outcomes.

FX View:

DXM: A Tool to Gauge Retail Sentiments

USD/CAD Current Retail Long/Short Position

The DXM shows that 19.8% of traders are bullish, while the remaining 80.2% 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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