Short USD/CAD on 1.2000 Break, Short Gold as Monetary Policy Shifts: Q3 Top Trading Opportunities

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USDCAD and Gold Talking Points:

  • The Dollar ended the first half of 2021 with a strong rally, but the fundamental backdrop will make for a difficult environment to foster this recovery
  • Should the Fed’s efforts prove successful in keeping the Greenback in check, there is some high-timeframe anti-USD potential in pairs like USDCAD
  • The US central bank isn’t the only one pulling back on the extreme accommodation, and that collective rise in yield forecast is a threat to Gold’s high perch

Both of my preferred setups for the past quarter (range USD/JPY and long USD/CNH) struggled as the Dollar could not find meaningful traction on a more hawkish outlook for its own monetary policy. I believe that the Federal Reserve is working up towards ‘normalizing’ – tightening but from an extremely accommodative starting point – in the second half of the year. However, the efforts to acclimate the market and the timetable for when the taper schedule will be released can make for some difficult trading in the Greenback. Nonetheless, I believe this is an important overall theme for the markets this quarter and my preferred setups take this kind of current into consideration. The very high-level technical picture of USD/CAD with the Bank of Canada ready to take policy steps of its own and Gold’s exposure to a rise in yields across the globe.

Chart of USD/CAD (Monthly)

Short USD/CAD on 1.2000 Break, Short Gold as Monetary Policy Shifts: Q3 Top Trading Opportunities

Chart Created on IG Trading Platform

For USD/CAD, I have certainly been watching the post-pandemic slide the pair has driven into the end of the second quarter. A failed attempt to produce a bullish break above that descending trend channel led me to consider the fundamental backdrop. While the Fed is moving towards an eventual taper which starts a hawkish Fed path, the BOC had already tapered in April and there is healthy speculation of another such move in the 3Q. That puts the forward yield advantage to the Canadian Dollar and many other fundamental considerations on the pair are largely neutralized. On the technical side, I would like to see progress that can perhaps override Summer Doldrums. A break of 1.2000 – which is the midpoint of the past decade range – could qualify.

Chart of Gold Overlaid with Aggregate of Central Banks Balance Sheets (Daily)

Short USD/CAD on 1.2000 Break, Short Gold as Monetary Policy Shifts: Q3 Top Trading Opportunities

Chart prepared by John Kicklighter with Data from Bloomberg

Gold is another well-established market connected to the ebb and flow of monetary policy. However, while the Dollar is the typical baseline for the precious metal, the commodity is a reflection of yield and interest rates the world over. While the Fed may take its time to tighten the reigns through this coming quarter, the cumulative shift across the world is towards pulling up from the extremely easy course we have seen extended through the pandemic. You can plot Gold’s performance against balance sheets (stimulus) like I did above, but it also has market roots with an inverted relationship to the aggregate of global government bond yields. This is a fundamentally driven view, but for technical levels, I will look for a break of 1,675.

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