USD to CAD Price Forecast: Steady Ahead of US, Canada Job Reports

Highlights

• Treasury yields influencing USD to CAD strength.
• Fitch’s US downgrade shakes market.
• BOC’s aggressive approach to bolster loonie.

Overview

As the world’s financial markets hold their breath, the USD to CAD pair trades almost flat. Investors and traders worldwide are eagerly awaiting the US Non-Farm Payrolls report, Canada’s Employment Change, and Unemployment Rate reports. A rollercoaster week for Treasury yields, which have touched their highest level since November 2022, has driven the USD/CAD pair’s bullish performance.

Treasury Yields Stir USD/CAD Fluctuations

Treasury yields have had a significant impact on the Forex pair’s fluctuations. The 10-year Treasury jumped 11 basis points to 4.185% while the yield on the 2-year Treasury climbed marginally higher at 4.881%. The shifts in Treasury yields come in response to traders digesting new economic data and contemplating Fitch’s recent U.S. downgrade.

Fitch Downgrade Shakes USD/CAD Market

The downgrade, which saw the U.S. long-term foreign currency issuer default rating drop from AAA to AA+, was caused by “fiscal deterioration,” shaky governance standards, and mounting general debt. This news from Fitch Ratings shocked the markets earlier in the week and has since been a critical player in influencing investor sentiment.

Jobs Report Eyed Amidst Slowdown

Concurrently, traders are keenly observing the recent key economic data which portrays the labor market and economic health. The hope is that a slowdown in hourly earnings growth might convince the Federal Reserve that past interest rate hikes have achieved their goal. With economists predicting the addition of 200,000 nonfarm payrolls in July and a steady unemployment rate of 3.6%, all eyes are firmly fixed on the forthcoming jobs report.

BOC Hike Bolsters Loonie Forecasts

In contrast, the Bank of Canada (BOC) has adopted an aggressive approach towards inflation by raising its benchmark interest rate to a 22-year high of 5% last month. They also hinted at further possible tightening. Analysts have subsequently revised their forecasts upwards for the Canadian dollar, while the loonie is expected to strengthen about 2% to 1.31 per U.S. dollar in the next six months.

Anticipated Fed Shift Will Boost Canadian Dollar

Bets are now placed on the Federal Reserve concluding its interest rate hikes, followed by rate cuts expected in early 2024, with the USD forecasted to soften broadly over the next 12 months. This anticipated shift, along with a globally improving risk backdrop, is seen as favorable for Canada, given its status as a significant commodities exporter.

Forex Market Awaits BOC’s Next Move

In conclusion, while the Bank of Canada may mirror the Fed’s interest rates adjustments in 2024, the Canadian dollar’s support is expected to come from a generally softer USD and investor diversification away from USD-denominated assets. Amid this drama, the Forex market waits for the next move.

Technical Analysis

The USD/CAD is currently displaying bullish sentiment, trading slightly above its previous 4-hour close and surpassing the 200-4H and 50-4H moving averages. The 14-4H Relative Strength Index suggests strong buying momentum, further bolstering this bullish trend.

The pair is testing the main resistance zone. If broken, this could confirm the bullish bias. This analysis, however, should be continuously updated with new market information and developments because the USD to CAD is nearly overbought and ripe for a correction.