USD/CAD forecast: Investors eye BOC and ISM PMI ahead of NFP

USD/CAD forecast: Weekly Overview

After a data-driven slump on Monday, the US dollar has shown slight strength against most major currencies, remaining positive territory as of mid-morning in the European session on Wednesday. The second half of the week will be busier for the greenback, with numerous top-tier data releases expected. Today, we will have the ADP private payrolls data and the latest ISM services PMI. The USD/CAD in particular is going to experience significant volatility due to additional risk events in Canada, where the Bank of Canada is anticipated to cut interest rates by 25 basis points today. This week’s other key data include the official US jobs report for May, slated for release on Friday. These macroeconomic events could set the dollar’s trend for the coming days if not weeks, putting the USD/CAD forecast under the spotlight.

Canadian dollar hurt by oil’s decline despite US data weakness

The USD/CAD remained above the crucial 1.3600 level even after the US dollar depreciated against most major currencies on Monday following a disappointing ISM manufacturing PMI. Additionally, construction spending unexpectedly fell by 0.1% month-on-month. However, this was insufficient to push the USD/CAD below the key 1.36 support level.

The decline in oil prices, which fell due to weak US factory data exacerbating demand concerns already highlighted by the OPEC+ decision to extend its output cuts on Sunday, weighed heavily on the CAD. Today, oil prices have rebounded slightly after dropping for five consecutive days and falling for the third straight week. It is reasonable to expect some profit-taking by the sellers and some bargain hunting from the bullish camp.

Therefore, the USD/CAD is a pair to watch ahead of this week’s crucial US data releases and the Bank of Canada’s policy decision on Wednesday.

BOC expected to cut rates by 25 basis points

The Bank of Canada (BOC) last increased interest rates to 5% in July of last year. Now there's speculation that it may start cutting rates again. Recent Canadian macroeconomic data has been mixed. Employment data was robust, with a net gain of 90,000 jobs reported for April, while retail sales were unexpectedly weak, showing a month-over-month decline of 0.6% compared to the expected rise of 0.3%. Additionally, all measures of CPI came in below forecast, which is particularly significant.

According to a Reuters poll, three-quarters of economists expect the BOC to reduce its policy rate to 4.75% at today’s meeting. The same poll indicates the possibility of three more rate cuts this year, though the final cut remains uncertain. Given the uncertainty surrounding a potential rate cut at this meeting, the Canadian dollar could see significant movement based on the decision. This uncertainty stems from the BOC's potential reluctance to diverge from the Federal Reserve, which is expected to wait until at least September before considering a rate cut. However, with Canada’s CPI consistently within the BOC’s 1%-3% target range for several months, the BOC might not have a strong reason to delay the rate cut.

US dollar faces key test with major data releases

Consistently weak manufacturing data globally has heightened demand concerns, leading to significant selling in crude oil and putting pressure on the Canadian dollar.

The US dollar is in focus this week due to a slew of significant data releases. Key US economic indicators to watch include the ISM Services PMI and ADP private payrolls today, followed by the May jobs report on Friday.

Another important data point was the JOLTS Job Openings report, which came out yesterday and indicated a softening labour market, with the number of job openings in April falling to 8.06 million from a downwardly revised 8.36 million in March.

Here’s the full list of key data releases to watch on the economic calendar this week:

Federal Reserve potential rate cut timing in focus

The Federal Reserve has signalled its willingness to wait until the end of summer before potentially cutting interest rates. Markets are now pricing in a 65% probability of a September rate cut, up from under 50% last week.

This week’s upcoming jobs report and wage data should impact those probabilities further. In recent days, bond yields have fallen back thanks to weakness in US data, after rising sharply towards the end of May as investors grew increasingly concerned about interest rates remaining elevated for an extended period. If this sentiment shifts due to a series of below-forecast US data, the US dollar may finally break down more decisively and establish a clear downward trend.

USD/CAD forecast: technical analysis

Source: TradingView.com

Despite this week's disappointing US data, the USD/CAD held above the key 1.36 support level despite the EUR/USD reaching a fresh multi-month high. The USD/CAD has attempted to break out of its bearish channel twice in the past two weeks but failed to sustain any upward momentum, with resistance at 1.3735 holding firm. This indicates a somewhat directionless short-term trend, as reflected by the price oscillating around a flattening 21-day exponential moving average.

The key level to watch is around 1.3600, which served as resistance multiple times from December through March and early April before an eventual breakout. A rounded retest of this level from above held firm several times in mid-May. However, the lack of follow-through on the upside means more price action is needed to establish a strong directional bias.

A decisive break below 1.3600 would be a bearish signal, though confirmation would require a move below the technically significant 200-day moving average, coming in slightly lower. This is the scenario bears are looking for. For the bulls, a clean break above the 1.3735 resistance is necessary to shift the balance in their favour.

For more updates on the USD/CAD forecast and in-depth analysis, stay tuned to our latest reports and technical insights.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R