Today's bounce in USD/CAD has fallen flat
You can usually guess how far a market will fall based on how high the bounces are.
USD/CAD took a swan dive to 1.24 from 1.38 in May but the bounce looks like it could be snuffed out at 1.26. That's the dead-cat variety of bounce and means the USD/CAD bears might want to sell sooner rather than later.
The pair has been in a bit of a retracement for the past six days after dropping on last Friday's surprisingly strong Canadian GDP report. Today the rebound extended to a high of 1.2618, that's the best since July 19. But since then, the pair has fallen to 1.2580, which is slightly higher on the day.
Technically, all USD/CAD needs to do to signal a move lower is coming is chop sideways for another week. That would confirm there's no real appetite for a bounce and that the bias is lower. It might take longer to get there, but it means the trade is to sell the bounces, not to buy the dips.
Fundamentally, the day ahead is huge. The US and Canadian jobs reports are both due Friday and that could easily upend the story.
What's so tricky about this USD/CAD fall was that it looks like one big swoon, but it's actually two. The entirety of the first leg was due to Canadian dollar strength after the BOC signaled and then delivered a hike. The latest leg was entirely due to broad USD dollar weakness, including today.
Starting the day after the BOC hike, July 12, the Canadian dollar has underperformed every major currency except the US dollar and Swiss franc.
A big question if you're looking ahead is: Will the next leg in the pair be Canadian dollar strength? Or more USD weakness?
If you try to isolate the CAD side by looking at something like AUD/CAD, it paints a different picture.
That pair had the same kind of swoon beginning in early May but the bounce took the pair back to mid-June levels (which equates to 1.31 in USD/CAD). Lately, the pair has had a decent bounce but it also looks like it's petering out. The peak in late July was higher than the one this week and the series of lower highs has continued. That means the Canadian dollar side of the trade could be gearing up for another push.
The US dollar, meanwhile, is a wildcard. The market clearly wants to buy it and believe the Fed is right about coming inflation but specs keep getting beaten up by bad data. It happened again today with the soft ISM non-manufacturing index and that's the main reason today's USD/CAD rise floundered. That said, if wage inflation in Friday's non-farm payrolls report is strong, there will be a race back onto the US dollar train.
Bottom line
Ultimately, it's tough to shake the idea that Canadian dollar strength is done. The Bank of Canada hiked rates and that isn't the kind of stance they're going to abandon in a month. Technically, any way you cut it, the CAD bounce don't look like it has much left.
Still, tomorrow is a big day for fundamentals and you have to go where the data takes you, but if US wage growth is soft, I would be quick to pull the trigger on selling USD/CAD. A drop to 1.20 could come quickly.
