USDCAD correction seems completed

The USDCAD currency pair has spent the last week and a half in a state of correction, pulling back down from the six-month high of 1.37. A decline in prices stopped when it approached the Fibonacci 50% level (1.34). Now the bulls are trying to seize the initiative and turn the price movement upward. In case of success, the first target for the U.S. dollar buyers will be the level of 1.3555.

The Fed's tight monetary policy remains the main reason for the U.S. dollar strengthening. Assets denominated in the U.S. currency offer increasing yields, even if the financial regulator does not raise the key rate. Thus, the U.S. 10-year bonds now offer yields of about 4.5%, and 2-year bonds are yielding 5.2%. The rates on similar Canadian securities, despite the maximum yield since October 2008, are hovering around 4%.

This week's inflation statistics provided some support to the Canadian currency. In August, price growth accelerated more than expected - from 3.3% to 4% with a forecast of 3.8%. Nevertheless, the majority of market participants still do not expect the Bank of Canada to further hike the key rate. The probability of such a move at the meeting on October 25 increased from 23% to 42% and almost equaled the forecast for the Fed's actions on November 1. That is, the difference in the level of rates in the U.S. and in Canada is unlikely to change.

Judging from the Bank of Canada's minutes of its most recent meeting, released on Wednesday, officials are wary of excessive monetary tightening and see increasing evidence that rates are already high enough. Plus, a growing number of regulators, including the Fed and the Bank of England, are choosing to keep rates at current levels. The Bank of Canada's caution plays in favor of USDCAD growth.

The Stochastic indicator on the daily chart of USDCAD reversed upward and gave a buy signal, increasing the probability of a rise in prices. The Fibonacci level of 23.6% (1.3555) may become the nearest growth target.

Consider the following trading strategy:

Buy USDCAD at the current price. Take profit - 1.3555. Stop loss - 1.34.

Traders may also use a Trailing stop instead of a fixed Stop loss at their discretion