US Dollar Up on Hawkish Statement From Fed Presidents

US Dollar Up on Hawkish Statement From Fed Presidents

 

The US dollar remains weak against its rivals as the inflation outlook provided by the Fed at the end of the December FOMC meeting was not impressive to the market. Further, the Fed had stated that it is unlikely for the US economy to expand at the current annualised growth rate of about 3.1%. The poor Non-Farm payroll data reported last week raised doubts about the possibility of three rate hikes in 2018. On the contrary, the Canadian dollar was strengthened by a better-than-expected employment data. Overall, the USDCAD pair has fallen to a low of 1.2350 in the past few trading sessions. However, we expect a trend reversal in the days ahead due to reasons given below.

In a Reuters interview, Federal Reserve Bank of Cleveland President Loretta Mester said the low jobless rate and strong economic growth supports the idea of four rate hikes in 2018. Toeing the same line, in another interview to Reuters, San Francisco Fed President John Williams said the US economy is likely to get a further boost from the tax reform and so there should at least three rate hikes in 2018. The market seems to have priced in only two rate hikes this year. So, the hawkish statement is expected to turn the greenback bullish.

In Canada, the Richard Ivey School of Business reported a decline in the Purchase Managers Index to 60.4 in December, from 63 in the earlier month. Analysts had expected a PMI reading of 62.2. The index is based on a survey of about 175 purchasing managers, comprising all sectors.

A Reuters poll also indicated that the Canadian dollar will weaken in the coming months as the Bank of Canada may not be inclined to raise interest rates as frequently as the Fed. One of the reasons for the hesitation is the uncertainty caused due to NAFTA negotiations. Mark Chandler, head of Canadian fixed-income and currency strategy at RBC Capital Markets said “The Fed looks to be more aggressive earlier in the year as compared to the Bank of Canada. We don’t think the bank will follow through this month. We think that they’ll wait and see what the outcome is of some of the trade talks.”

The US President Donald Trump has threatened to pull out from the NAFTA deal, if the outcome is not satisfactory to the US. The next meeting is scheduled to be held in Montreal (Jan 23-28). Officials will be engaged in talks related to autos, expiry clause and dispute settlement. A positive outcome is a must for Canada, which ships almost 75% of its exports to the US. Interestingly, economist at CIBC Capital Market, Nick Exarhos said the Canadian dollar would have to depreciate by about 5% to offset the tariff increase that will be triggered by a dissolution of NAFTA. Thus, fundamentally, the USDCAD pair is expected to rally soon.

Technically, the price chart indicates the USDCAD pair has bounced off the support at 1.2380. The stochastic indicator has started rising from the oversold region. Thus, we can expect a trend reversal in the USDCAD pair.

USDCAD - Technical Analysis - 9th January 2018

To benefit from the anticipated rally in the USDCAD pair, we may open a long position near 1.2400 in the Forex market. A stop loss order will be placed below 1.2280. If the forecast turns out to be right, we will book our profit near 1.2570.

In the trading platform of binary brokers listed here, we may look for a call option, with a weekly expiry period. We will consider investing only if the USDCAD pair is trading near 1.2420 in the spot Forex market.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.


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