USD/CAD: Loonie Gains As Traders Raise Bets on BoC Rate Hikes

Summary:

Traders are betting on a more aggressive rate hike path by the Bank of Canada (BoC), which is causing the USD/CAD to fall this Monday.

The USD/CAD has reversed all Friday’s gains and is now trading 0.64% lower after FX market participants priced in a more aggressive tightening of interest rates by the Bank of Canada (BoC). Rising oil prices are also a source of Loonie strength this Monday.

The pair had witnessed a % uptick on Friday as US jobs data outperformed its northern neighbour. Both data were released simultaneously, and the divergence in the employment data allowed the USD/CAD to push northwards. However, despite weak employment data, bets on a 75 basis point hike by the BoC in its September meeting have risen to a 67% probability. This is because Friday’s underwhelming jobs report is seen as a blip in the pathway of firm growth in the underlying employment trend in Canada.

The sentiment is also getting a lift from the latest Commitment of Traders (COT) report released on Friday, which shows a ramp-up in net longs on the Loonie by institutional traders. In addition, a 1.93% gain in crude oil prices on the Brent benchmark also supports the commodity-linked Loonie. This comes as short-position holders take profit from the recent slump.

USD/CAD Forecast

The downside move of the day comes after the completion of the falling wedge’s measured move at 1.29884. The violation of the 1.28679 support paves the way for a retest of 1.28221 (28 June and 4 August lows). A further decline breaks down this support, making 1.27662 (23 May and 1 August low) available as a new target. Additional downside harvest points for short sellers are found at 1.27212 (27 May low) and 1.26871, the site of the 2 June high and 10 June low.

On the flip side, the bullish sentiment on the pair returns if the bulls force the price action above the 1.31346 high (15 July 2022 high). This scenario would require the bulls to uncap resistance barriers at 1.29884 (21 June and 5 August high) and 1.30774 (12 May, 17 June and 5 July 2022 highs). 1.32655 could become a potential harvest point for the bulls if they can clear the 1.32237 high seen on 14 July, the highest level of 2022.