Canada’s economic highlight this coming week is April retail sales. With oil prices rising, Canada a significant exporter of black gold gained traction and has had a robust upward trend against the Greenback since hitting a high in April of 2020. U.S. yields have been the key to the USD/CAD. The recent rebound is the expectations of the market that the Fed will reduce bond purchases sooner rather than later.
The U.S. dollar surged higher against the Canadian dollar last week, rising 2.5%. The USD/CAD closed above trend line resistance and ran out of steam near 1.25 as prices moved into overbought territory. The currency pair appears to be testing the breakout level, which will be key support. Ahead of the gains seen by the CAD, the USD/CAD was overbought as the fast stochastic was printing a reading of 96, well above the overbought trigger level of 80, foreshadowing a correction.
The relative strength index (RSI) ahead of Monday’s rally in the Loonie was printing a reading of 74, above the overbought trigger level of 70, which foreshadows a correction. Medium-term momentum is positive as the MACD (moving average convergence divergence) histogram is printing in positive territory with an upward sloping trajectory which points to higher prices for the USD/CAD.
The pullback in U.S. yields has helped the Loonie gain traction. The change of dot plots by the Federal Reserve helped the 2-year yield gain 6-basis points, which helped the dollar surge higher. The markets are now incorporating the likelihood that the Fed will be on hold for a while, taking some of the steam out of the Greenback. If prices are also to hold support, look for another leg up in the U.S. dollar.