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Forex Market Outlook: USDCAD Below 1.2400 Amid Dollar Softness as USDJPY Rally Stalls

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Forex Market Outlook: USDCAD below 1.2400 amid Dollar Softness as USDJPY Rally Stalls
  • US Dollar is on the defensive on yields losses.
  • USDCAD holds firm near three-month lows.
  • USDJPY rally stalls amid greenback softness.

The US dollar was on the defensive Thursday morning after coming under pressure on Wednesday. The cautious tone around the greenback comes as investors wait for pivotal economic releases ahead of next week’s crucial Federal Reserve meeting.

With the FED gone into a blackout period, the dollar remains at the mercy of economic releases that should provide hints on what the FED is likely to do next week. The release of the 3Q GDP data should provide insights on whether the FED will come through on asset tapering.

USDCAD technical analysis

Amid the dollar softness, the Canadian dollar has been one of the biggest beneficiaries strengthening to three-month highs. The USDCAD has dropped below the 1.2400 level and now trading near the key support level at 1.2340

Chart showing USDCAD trying to bounce back

Above the 1.2340 level, the USDCAD pair remains well supported for an uptick above the 1.2400 level. Likewise, a sell-off followed by a close below the 1.2340 level could accelerate a drop to the 1.2280 level, the next support level.

Ahead of the FED meeting next week, the Canadian dollar looks set to fend off any dollar strength, a development that could see the pair edging lower. The CAD is receiving support in the market in the aftermath of the Bank of Canada turning hawkish about Canada’s economic situation.

Bank of Canada hawkish

The central bank has decided to end its QE asset purchases immediately, a move that automatically reduces the flooding of CAD into the market. The BOE bringing forward the prospect of the first-rate hike to mid-2022 also continues to fuel CAD strength against the greenback.

Additionally, the Canadian dollar remains well supported, with oil prices trading at multi-year highs. A spike in the oil price to above the $80 a barrel level has continued to fuel CAD strength, given that it is one of Canada’s biggest exports. With oil prices at three-year highs, the country is well-positioned to generate significant revenues from the trade.

On the flip side, losses on the USDCAD could be limited by the FED moving to taper bond purchases next week and reiterating a path to hiking interest rates. The US is grappling with a spike in inflation, which forces the FED to act sooner than later.

The FED tapering and hinting of rate hikes as early as next year is likely to fuel dollar strength, something that could curtail further sell-offs on USDCAD, as has been the case in recent days. However, in the meantime, bearish biasness remains intact, especially on US treasury yields edging lower and piling pressure on the greenback.

USDJPY retreats

Meanwhile, the Japanese yen also continues to gain ground against the dollar, which remains under pressure on treasury yields edging lower. The USDJPY has since dropped below the 114.00 level, tanking to lows of 113.54, close to a crucial support level at 115.40 level.

Chart showing USDJPY pullback

A drop followed by a daily close below the 113.34 level could trigger renewed sell-off that could see the USDJPY tanking to two-week lows of 112.04.

The Japanese yen continues to hold firm against the dollar despite the Bank of Japan holding the benchmark rate at record lows of -0.10% and the ten-year government bond yield near 0%. Additionally, traders continue to shrug a move by the BOJ to revisit the quarterly economic forecast for 2021-22 downwards.

In addition, the Japanese yen continues to hold firm as a safe-haven amid concerns over escalating tensions between the US and China over telecom Huawei and Taiwan.

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