Canadian Dollar Charts Argue for Strength but Loonie Keeps Nervous Eye on Jackson Hole 

Image © Bank of Canada

- CAD cedes ground to USD, GBP ahead of central bank conference.

- Fed's Powell is a downside risk for CAD and BoC's Poloz a wild card. 

- As Scotiabank says charts flagging risk of more USD/CAD downside.

- But GBPCAD due consolidation on charts, amid lift from Brexit factors.

Canada's Dollar ceded ground to its U.S. and British rivals Thursday after movement on the Brexit front aided Sterling and as the American bond market threw another tantrum ahead of an eagerly-awaited speech from Federal Reserve (Fed) Chairman Jerome Powell.

Pound Sterling topped the G10 league table after talks between Prime Minister Boris Johnson and European leaders persuaded the market the odds of the UK avoiding a ''no deal' Brexit may have just improved, although the U.S. Dollar was also on its front foot. 

"We rather view recent price developments as a consolidation, ahead of a renewed push lower (below 1.60), than a reversal. Sustained gains through 1.6230 would give the GBP a little more stability in the short run but the cross has a long way to go before we can relax about downside risks," says Eric Theoret, a technical analyst at Scotiabank.

The U.S. Dollar gained after the yield curve inverted again as investors expressed concerns that Fed Chair Jerome Powell will not meet on Friday, the high bar of expectations preset for him by the market. Investors have bet heavily this month the Fed will cut its interest rate on at least three more occasions this year, although the minutes of the last Federal Open Market Committee meeting laid bare an absence of consensus on the FOMC about the path for U.S. borrowing costs. And since the July 31 meeting, U.S. economic data has remained strong, which might mean there's not been much of a shift in stance among rate setters. 

"After some initial gyration following the release of the FOMC Minutes yesterday, market participants voted to unwind the “Fed rate cut trade” a little further ahead of tomorrow’s speech from Jerome Powell at Jackson Hole. Bond, Eurodollar and gold futures moved lower," explains Erik Bregar, head of FX strategy at Exchange Bank of Canada. "USDCAD, in particular, was able to regain trend-line chart support in the 1.3270s and rally above the 1.33 handle."

Above: USD/CAD at hourly intervals alongside Pound-to-Canadian-Dollar rate (black line, left axis).

The minutes and current condition of the domestic economy saw investors sell out of the U.S. bond market Thursday, with two-year and other short-dated debts seeing the bulk of the outflows, lifting two-year yields over and above those of 10-year bonds. This drove the inversion of the yield curve, which represents the cost of government borrowing for maturities between one month and 30 years. It inverts when short term bonds pay more than long-dated ones. 

Those curve inversions are normally seen by investors as harbingers of recession and when it comes to the U.S., economic fears are normally bad for commodity-backed currencies like the Canadian Dollar and other so-called risk assets, while typically offering support to the safe-haven U.S. Dollar. This and the rise in short-term bond yields that prompted the curve inversion are positive for the greenback.

Yield curves have inverted and fears for the global economy risen ever since President Donald Trump said in early August that he intends to impose a 10% tariff on all of China's exports to the U.S. that are not yet covered by punitive levies. Some tariffs are scheduled to go into effect on September 01 and the rest on December 15, which will mean substantially all of China's trade with the U.S. is encumbered by one levy or another. 

Exchange Bank of Canada sees the Fed's fingerprints all over Thursday's move in the USD/CAD rate but another Canadian firm says Bank of Canada (BoC) Governor Stephen Poloz could also be in the mix too, with TD Securities sceptical of whether he's say anything that harms the Loonie if he even appears at the Jackson Hole conference on central banking. The Fed's Powell is scheduled to speak about "Challenges for Monetary Policy" at 15:00 Friday.

"The recent run-up in USDCAD towards 1.33 appears to be predicated on a narrative that Poloz may signal a rate cut in September at Jackson Hole. While his presence has yet to be confirmed, we do not see any urgency for him to do this. As a result, a disappointment here is likely to pull USDCAD tactically lower in the coming days," says Mazen Issa, a strategist at TD Securities. 

Above: USD/CAD at hourly intervals alongside Pound-to-Canadian-Dollar rate (black line, left axis).

TD Securities is looking for the Canadian Dollar to strengthen and the USD/CAD rate decline at a time when another Canadian firm is also looking for a similar move, although for reasons that are entirely technical in nature. 

Eric Theoret, a technical analyst who studies trends and momentum on the charts at Scotiabank, says the U.S. Dollar is losing momentum and likely to retreat from recent highs sooner or later.

"Short term trend signals are turning more USD-negative now and the weakly constructive longer run signals noted previously are moderating quickly. We look for firm resistance in the mid-1.33s from here and for weakness below 1.3250 to signal scope for more, extended losses," Theoret writes, in a note to clients.

Theoret says the USD/CAD rate could probe down to 1.3195 on the interbank market over the coming days because the rally seen through July and August looks to be "failing" just below a key fibonacci retracement level located at 1.3355. The exchange rate has tried but failed to rise above that retracement level twice in August and remained more than 50 points below it Thursday despite broad gains for the greenback. 

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