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Day three: potential USD/CAD trade

My potential trade idea from yesterday - long USD/CAD from 1.0711 - has got off to a good start, although has found good supply around the 1.0770 area.

USD/CAD
Source: Bloomberg

The pair has closed above the 38.2% retracement of the June to July sell-off at 1.0751 and this should be seen as a positive development.  I am therefore keen to move my stop loss on the potential trade idea to 1.0680, just under the July 8 high and 50% retracement of the recent rally from 1.0620.

Janet Yellen’s testimony to the Senate threw up few surprises, and while the market saw the narrative as modestly dovish, I actually saw signs that the Fed could be ready to move on rates sooner than market pricing. The Fed chairman testifies again tonight, although this time to the House, but little is expected.

The bigger event risk and driver of price action comes from the Bank of Canada (BoC) meeting also at midnight (AEST). Interest rates will be kept on hold at 1%; however it’s the narrative that is of most importance. Headline and even core CPI has been rising in Canada and it’s the language the BoC use around price rises that will determine the price action around the CAD.

Like in the US, wage inflation is subdued and if the bank follow the lead from the FOMC and suggest the trend higher in inflation is ‘noise’ then my potential trade idea should benefit. I sit in the camp that the BoC will verge on the dovish side, in-line with the stance from other G10 central banks and thus I expect CAD weakness. I have however raised my proposed stop loss in case the central bank really surprise.

Spot FX USD/CAD chart
Click to enlarge

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