USD/CAD inter-markets: further upside hinges on Fed

USD/CAD is retreating since Monday’s test of the key 200-day sma in the mid-1.3200s, shedding nearly a cent to today’s lows in the 1.3130 area. This is a key support area, as seen by several tests in previous sessions, although sellers have so far failed to break below it.

CAD remains driven almost exclusively by crude oil dynamics, relegating the US-CA 2-year spread differential to the passenger’s seat, while the divergence in monetary policy between the Federal Reserve and the Bank of Canada is expected to gather further relevance as a key driver later in the year.

In the meantime, yields in the US money markets keep favouring the buck vs. its neighbour in the shorter-end of the curve, with a mixed performance around the belly and the longer-end.

Volatility gauged by VIX has bounced off session lows, while Fed Funds futures prices have climbed to the upper end of the range. According to CME Group’s FedWatch tool, the probability of a Fed’s rate hike today has ticked higher to 15%, while it’s advanced to nearly 50% for the December meeting.

Regarding FX, a positive surprise at today’s FOMC meeting could well see another test of the mid-1.3200s (recent highs and 200-day sma) ahead of the 1.3310 area (retracement of the 2016 drop) and then 1.3680 area (top of the 4-month rising channel). On the other hand, a break below the base of the 4-month rising channel in the mid-1.3000s could open the door for a test of September’s low near 1.2830.