Today, the dollar is moving broadly lower following yesterday’s Fed meeting that the market apparently perceived as dovish. The Fed largely kept everything unchanged from the June meeting, except for the slight (hawkish) language change in the FOMC statement where they expressed that progress toward the policy goals is being made (especially on inflation which is already way above target). 

However, the dovish kick came during Powell’s press conference, where instead of focusing his talk on tapering plans, he spoke more about how far the Fed is from achieving their target on full employment. This was when the dollar sold off. Of course, he didn’t miss the chance to reiterate the dovish stance that the inflation jump should be entirely transitory.

The fact that the USD was at a key resistance (as seen in the DXY index, while EURUSD at support) also helped to fuel the dollar correction. Today, feeding the move from the dovish Fed further, the GDP report also missed expectations of 8.5% Q/Q annualized growth and only grew 6.5%. This will likely negatively affect the Fed’s tapering plans, as slower GDP could mean slower job gains.

In line with the above, we are looking for tactical opportunities to go short on the US dollar. And for that purpose, one of the most attractive currencies to go long currently appears to be the Canadian dollar. The CAD has a relatively hawkish central bank (BOC) and is supported by the broad rally in commodities and risk appetite. It was also one of the best-performing currencies among the Fx majors this year, which could be another supportive factor as traders who are bullish will like to add longs as well.

Below, we look at the charts and the specific trade setup to short USDCAD.

USDCAD is now moving further lower after breaking the ascending channel formation that goes back to the beginning of June (see chart below). 

The last support to the downside – a Fibonacci confluence zone of the 38.2% and 61.8% retracements – was at 1.2460-1.25 (slightly above current levels) USDCAD now appears to be firmly moving below this zone, which is an important bearish sign. The next important support zone is all the way down toward the 1.23 level. This is our target with this trade.

The 1.23 zone is key support because of the convergence between the 55-day (blue) and 100-day (orange) moving averages with the 61.8% Fib retracement of the June-July August. Therefore, we can expect some price reaction when USDCAD reaches this 1.23 zone. At the same time, in the current context (with the recent bearish USD news from the Fed and GDP), it seems very likely that USDCAD will indeed fall toward 1.23.

With the setup laid out in full above, let’s now look at the risks to this trade. They are mainly related to data releases on the Fx calendar for tomorrow and next week. The key ones to focus on are: 

• Core PCE Price index (Fed’s other inflation measure) tomorrow
• Canadian GDP tomorrow
• Then, the focus will shift on the US Nonfarm Payrolls and Canadian jobs reports next week, all released at the same time next Friday (August 6 at 8:30 am ET).

Tomorrow’s US core PCE inflation index will likely be more important than Canadian GDP. It is forecasted to show a 3.9 y/y increase. Higher than expected numbers could boost the USD, potentially taking USDCAD higher. However, tomorrow’s data shouldn’t completely reverse the setup or hit the stop loss for our trade.

The real test will be next week’s US NFP and Canadian jobs data. By that time, we hope USDCAD will hit our 1.23 target, and we can close the trade by then. If USDCAD doesn’t reach 1.23 by next Friday, we would still close the trade ahead of the key jobs reports next Friday.

Entry: 

• Look to enter near current levels (1.2440), or higher if possible, on potential retracements;

Stop: 

• The price should not move above today’s daily high (1.2530), if this trade is going to work as expected.;
• Therefore, the stop loss can be placed slightly above 1.2530

Targets:

• The 1.23 support zone, as described above.

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