The Canadian dollar falls across the board as trade talks collapse and US 50% tariffs take effect
FUNDAMENTAL
OVERVIEW
USD:
The US dollar weakened
across the board last week after the US Treasury announced that it will at
least double the size of its liquidity-support buyback operations for
longer-dated Treasury securities, increasing the maximum purchase from $2
billion to at least $4 billion per operation.
US Treasury Secretary Bessent
then said that part of the operation is sending a message to the market that
yields do not reflect underlying fundamentals and added that the buyback could
be more than $4 billion depending on conditions.
The Treasury
intervention in the market had a QE-like effect by lowering long-term
yields and easing financial conditions, although it’s not technically QE. That’s
why we saw the greenback selling off across the board following the
announcement.
In the long-term, long-term
yields are driven by monetary policy as they are just the average expected path
of short-term interest rates over the life of the bond plus a term premium, but
they are more sensitive to changes in economic outlook.
The focus will now shift to
the Federal Reserve and Warsh’s speech at the Jackson Hole Symposium next week.
I was expecting it to be a non-event given Warsh’s preference of not giving
forward guidance and the fact that the soft NFP and CPI reports eased Fed
tightening concerns. After the Treasury buyback announcement, though, the
speech could actually be a market-moving event.
If Warsh doesn’t lean
against the easing in financial conditions, the current “debasement"
trades like long precious metals, bitcoin and short US dollar will likely
extend further. On the other hand, if he pushes back saying things like “recent
easing in financial conditions, if sustained, could complicate the process of
returning inflation to our target" or “if recent easing threatens
progress toward price stability, we will not hesitate to respond
appropriately" and so on (I cannot know the exact words beforehand,
unfortunately), the market may interpret it as a signal for a potentially
hawkish September FOMC and trigger pullbacks in the “debasement"
trades.
CAD:
On the CAD side, the US-Canada
deal optimism after Wednesday’s extension of talks gave the loonie a boost,
which was then exacerbated by broad US dollar weakness. The USD/CAD pair fell
into a key support zone around the 1.3750 before bouncing into Friday’s close
on profit-taking and possibly some hedging into the weekend.
Unfortunately, the talks
collapsed and US imposed 50% tariffs on about $20bn of Canadian goods, with
Canada’s PM Carney vowing ‘dollar-for-dollar’ retaliation from September 8. The
delayed retaliation might be keeping a door open for further talks, but for
now, the Canadian dollar might stay on the backfoot as markets reprice the outcome.
USDCAD TECHNICAL
ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can
see that USDCADdropped into the 1.3750
support zone following the US Treasury buyback announcement and US-Canada deal
optimism. The price bounced into Friday’s close on profit-taking and opened the
week higher as the trade talks collapsed. The natural target for the buyers
should be the resistance zone around the 1.3920 level. The sellers, on the
other hand, will either wait for the price to come into the resistance or break
below the 1.3750 support to target new lows.
USDCAD TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we have
a downward trendline defining the bearish momentum. We can expect the sellers
to lean on the trendline with a defined risk above it to position for a drop into
new lows. The buyers, on the other hand, will want to see the price breaking
higher to increase the bullish bets into the 1.3920 resistance next.
USDCAD TECHNICAL
ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we
have a minor upward trendline defining the current pullback. The buyers will
likely lean on the trendline with a defined risk below the gap to keep pushing
into new highs, while the sellers will look for a break to pile in for a drop
back into the 1.3750 support. The red lines define the average daily range for today.
UPCOMING CATALYSTS
Today we have US Treasury Secretary Bessent unveiling the sanctions against
Iran. Tomorrow, we get the US Consumer Confidence report. On Wednesday, we have
the US PCE price index. On Thursday, we get the US Jobless Claims figures. On
Friday, we conclude the week with Canada’s GDP and Fed Chair Warsh’s speech at
the Jackson Hole Symposium.
This article was written by Giuseppe Dellamotta at investinglive.com.