USDCAD and Gold Talking Points: The dollar rallied strongly in the first half of 2021, but the underlying background will make it difficult to sustain this comeback. If the Fed’s efforts to keep the greenback under control are effective, there is some high-timeframe anti-USD potential in pairs like USDCAD. The Federal Reserve of the United States isn’t the only one easing off on its ultra-accommodative stance, and the resulting rise in yield expectations poses a challenge to Gold’s lofty position. As the Dollar struggled to gain traction on a more hawkish view for its own monetary policy, both of my favored setups for the past quarter (range USD/JPY and long USD/CNH) struggled. In the second part of the year, I anticipate the Federal Reserve will begin to ‘normalize,’ i.e. tightening from an excessively accommodative starting point. The efforts to acclimatize the market, as well as the timing for when the taper program will be revealed, may make trading in the Greenback problematic. Nonetheless, I feel this is a major overarching theme for the markets this quarter, and my favorite setups take this into account. The USD/CAD technical picture, with the Bank of Canada poised to take policy actions of its own and Gold’s vulnerability to rising rates around the world. USD/CAD Chart (Monthly)Chart IG Trading Platform was used to create this. In terms of USD/CAD, I’ve been keeping a close eye on the pair’s post-pandemic decline into the second quarter. After failing to create a bullish break above that falling trend channel, I started thinking about the underlying backdrop. While the Fed is going towards a taper that will begin a hawkish Fed path, the Bank of Canada has tapered in April, and there is healthy anticipation that it may do so again in the third quarter. As a result, the Canadian Dollar gains a forward yield advantage, and many other fundamental influences on the pair are virtually negated. On a technical level, I’d like to see development that may possibly overcome the Summer Doldrums. A break of 1.2000, the midpoint of the previous decade’s range, might qualify. Gold Chart Overlayed with Central Bank Balance Sheets (Daily)Chart created by John Kicklighter using Bloomberg data. Another well-established market linked to monetary policy ebbs and flows is gold. While the Dollar is often used as a benchmark, the precious metal is a reflection of yield and interest rates around the world. While the Fed may take its time tightening the reins in the coming quarter, the global trend is toward a change away from the exceptionally loose policy that has been in place since the pandemic began. Gold’s performance can be plotted against balance sheets (stimulus), as I demonstrated above, but it also has market foundations, with an inverted relationship to the world government bond yield average. This is a fundamentally driven perspective, but I’ll be looking for a breach of 1,675 on technical levels. View each DailyFX Analyst’s favorite trades for the third quarter. From the DailyFX Free Trading Guides, download our new 3Q top trading chances guide!
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