The Fed has entered its “Blackout period” ahead of next week’s FOMC meeting. However, in the weeks leading up to this, Fed speakers have been much less hawkish than they had during 2022. Even the Fed’s most hawkish members have toned it down heading into next week. According to the CME FedWatch Tool, traders are expecting pricing in a 99% chance of a 25bps rate hike to bring the Fed Funds rate to 4.75%. One of the reasons for the easing in hawkish rhetoric is that the US inflation data has been relatively subdued since the beginning of the year. Average Hourly Earnings for December was 0.3% MoM, weaker than expected, however November’s print was revised to 0.4% MoM from 0.6% MoM. In addition, Decembers CPI fell from 0.1% MoM to -0.1% MoM. This was the first negative print since May 2020! Other economic data was weaker as well, which encouraged markets to believe the Fed may guide to a soft landing. The ISM Non-Manufacturing PMI was 49.6, the first reading below 50 since May 2020. Other data such as Factory Orders, Industrial Production, Manufacturing Production, the NY Empire State Manufacturing Index, and the Philadelphia Fed Manufacturing Index were all negative. Retails Sales were worse than expected as well! The US will also release the Fed’s favorite measure of inflation this week, Core PCE. As a result of the lower inflation data, along with weaker manufacturing data and retail sales, the US Dollar and yields have moved lower while stocks have moved higher.
This week, the Bank of Canada will get its chance to decide whether it should increase interest rates or leave them unchanged. The Bank of Canada has been the leader at raising interest rates and slowing the pace of hikes. Traders are currently pricing in an 80% chance of a 25bps hike to bring its overnight rate to 4.50%. December’s CPI print fell from 6.8% YoY to 6.3% YoY. However, as with the CPI print in the US, the focus was on the MoM print which dropped -0.6% vs a prior reading of 0.1%. This was the largest drop since April 2020. The jobs data for December was strong. Canada added 104,000 new jobs to the economy vs an expectation of only 8,000 jobs. What made the jobs data even stronger: 84,500 of those jobs were full-time jobs! Is there any chance that the BoC would leave rates unchanged due to decreasing inflation, but with stronger jobs?
USD/CAD moved aggressively higher during September 2022 and made a recent high on October 13th, 2022, at 1.3978. USD/CAD then fell, forming a head and shoulders pattern with a target near 1.3010. However, support held the price above 1.3226. USD/CAD then bounced in mid-November to the 61.8% Fibonacci retracement level from the highs of October 13th to the lows of November 16th, near 1.3690. The resistance set up an AB=CD pattern, in which the length from A to B is equal to the length from C to D. Thus far, USD/CAD is trading moving in the right direction. Could the pair reach the target near 1.2950 with a hawkish BOC?
Source: Tradingview, Stone X
On a 240-minute timeframe, USD/CAD has been trading in a zone between 1.3321 and 1.3521 for much of January. If the pair breaks below the of the zone, the next support is the low from November 15th, 2022, at 1.3226 and then the 200 Day Moving Average (see daily) at 1.3190. Below there, the support isn’t until the round number psychological support level at 1.3000. However, if the AB=CD level fails to materialize, the first resistance level is the 50 Day Moving Average near 1.3499. Above there, price can move to the highs from January 19th at 1.3521 and then the highs of the prior move at 1.2705.
Source: Tradingview, Stone X
With the weaker US data as of late, along with the Bank of Canada meeting on Wednesday, USD/CAD may be volatile this week. If the BoC doesn’t hike or is extremely dovish, price could move above 1.3690. However, if the BoC hikes and is hawkish, the pair could be near the target of the AB=CD pattern quickly. Manage risk accordingly.