**Fundamentals**

 

The Canadian dollar has experienced significant volatility this year and is currently on the losing side. It began the year at 1.3245 against the U.S. dollar and fell to a low of 1.3946 late July 2024. Geopolitical tensions, a stronger U.S. dollar, and an uncertain global economic outlook, with fears of a recession in major economies, have driven demand for safe-haven currencies like the U.S. dollar, thereby putting additional pressure on the Canadian dollar.

 

However, since August 2, the Canadian dollar has shown signs of strength, while the U.S. dollar has come under pressure due to expectations of deeper interest rate cuts by the Federal Reserve (Fed), which is expected to start reducing interest rates at the September meeting. Last Friday, August 23, Fed Chair Jerome Powell's comments at the Jackson Hole Symposium solidified expectations for the September cut. The Fed Chair stated that further cooling in the labor market was unhealthy and that it was time to begin adjusting policy accordingly. Powell also noted that inflation was close to the Fed’s 2% annual target, but emphasized that the timing and scale of any rate cuts will still depend on economic data.

 

Last month, on July 24, the Bank of Canada (BoC) cut its overnight rate target by a quarter-point to 4.5%, following a similar cut in June. Many economists anticipate that the Canadian central bank will implement further rate cuts at each of its remaining three policy meetings in 2024.

 

The Bank of Canada’s and the Fed’s interest rate decisions are due on September 4th and 17th, respectively.

 

Meanwhile, rising crude oil prices, driven by a significant decline in U.S. inventories, are supporting the Canadian dollar. It’s important to note that higher oil prices generally benefit the CAD, as Canada is a leading oil exporter to the United States.

 

Ongoing geopolitical tensions in the Middle East could also heighten concerns about potential disruptions to crude oil supplies from this major oil-producing region.

 

**Technical Analysis**

 

From an Elliott Wave perspective, the pattern that the USD/CAD pair unveiled since October 2022, starting at 1.3977, may be identified as a combination W-X -Y. Where wave W is a zigzag, wave X is a zigzag, and wave Y is expected be an expanding or running flat, where we are targeting wave C of the flat to mature at a minimum of 1.3218 and complete wave Y. In the case of a regular flat, it could slide further toward 1.3026.

 

A combination consists of two or more corrective waves, and their occurrence is simply to extend a sideways action.

 

When drilling down on wave C of wave Y in a shorter time frame, it appears that the first wave (i) of a five-wave impulsive pattern (i)(ii)(iii)(iv)(v) is about to reach maturity around 1.3445. Following this impulsive move, we might expect a corrective pattern, labelled as wave (ii), which, according to Elliott Wave guidelines, should retrace to a minimum of wave (iv) of a lesser degree, around 1.3738. It should be noted that a corrective pattern can have various retracement levels, so we should wait for the pattern to unfold before providing further insights into the appropriate retracement level. After the completion of pullback wave (ii), the trend is expected to continue downward toward the target level to complete the 5-wave impulsive pattern of wave C of the flat.

 

However, a break above 1.3945 would invalidate the entire structure.

 

 

 

Disclaimer: This communication is provided for information and discussion purposes only. Unless otherwise indicated, it does not constitute an offer or recommendation to purchase or sell any financial instruments or other products. AfrAsia Bank does not guarantee or warrant the accuracy, reliability, completeness of the information in this publication.