Daily Outlook- 2 July 2024: Potential Bullish on USD/CAD

Summary:

Markets expect two Fed rate cuts, but the resilient US economy and sticky inflation may support a less dovish stance, boosting the USD. Dovish G10 central banks and potential US recession and tariff tensions ahead of the 2024 election may also support the USD. In contrast, although Canada’s CPI saw a significant surge in May, one month of data is unlikely to reverse the disinflation trend observed since January. As a result, the policy divergence between the Fed and BoC remains relevant and in play.

USD/CAD 4H

Macro View:

USD: Markets expect the Fed to cut rates twice this year, but the risks remain for a less dovish outlook given the still fairly resilient US economy and sticky US inflation. This translates into a relatively less dovish Fed outlook that burnishes the rate appeal of the USD and could keep the currency supported going forward. Most of the G10 European central banks stand to ‘out-dove’ the Fed this year and this should remain a major drag for their respective currencies for the remainder of the year. The second driver of the USD this year would be risk aversion on the back of a weakening US outlook and even a potential recession in late 2024 as well as escalating tariff angst in the runup to the 2024 US presidential election in November.

CAD: The upside surprise in the latest Canadian CPI failed to give the CAD a long-lasting boost. The May pick-up in Canadian inflation to 2.9% YoY ultimately largely matched the BoC’s central scenario as outlined in April, and as such domestic money markets have primarily trimmed the chances of back-to-back rate cuts from 60% to 40%, without altering much the prospects of two cuts in H224. The relative policy paths followed by the BoC and the Fed in the coming months could remain the main driver of USD/CAD, while at the same time record CAD short positions may keep a lid on the spot rate, keeping 1.38/1.40 as a strong resistance area.

FX View:

DXM: A Tool to Gauge Retail Sentiments

USD/CAD Current Retail Long/Short Position

The DXM shows that 20% of traders are bullish, while the remaining 80% 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. but with the recent economic development in US is not favor with this bearish move.

CAD Futures’ seasonality movement

The seasonal pattern for the CAD suggests bullish momentum in the near term but with the recent economic development in Canada is not favor with this strong move.

Sources: Prime Market Terminal

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