USD/CAD preserves small gains above 1.24, waits for next catalyst

The USD/CAD pair, which closed the previous week at its lowest level in more than 2 years at 1.2385, started the week with a small bearish gap but easily gained traction and turned positive above the 1.24 handle. As of writing, the pair was trading at 1.2423, up 0.22% on the day.

Today's price action seems to be a technical correction rather than a data-driven recovery as both the Canadian and American markets are closed due to the Labor Day holiday. Furthermore, the flight-to-safety that was triggered after North Korea announced that it tested a hydrogen bomb over the weekend dented the demand for risk-sensitive currencies like the loonie.

On the other hand, the US Dollar Index is moving sideways near mid-92s, failing to provide a fresh catalyst for the pair in the NA session. Tomorrow's economic calendar won't be featuring any data from Canada. However, on Wednesday, the Bank of Canada is going to be announcing its monetary policy decision. Although investors don't see any changes to the 0.75% policy rate, the statement will be looked upon for fresh clues regarding the next rate hike especially with the macro data in the last few weeks coming in strong.

• BoC to likely leave rates on hold - Westpac
• BoC: Housing market remains a concern for policymakers - BBH

Forecasting a potential market reaction, Marc Chandler, Global Head of Currency Strategy at BBH, says "we suggest that the Canadian dollar may weak regardless of when the Bank of Canada does. A rate hike may spur selling on the fact after the rumor was bought.  Standing pat would see the Canadian dollar weaken on disappointment.  We suspect that the failure to hike rates would produce a better buying opportunity."

Technical outlook

The first technical resistance for the pair could be seen at 1.2475 (10-DMA), 1.2550 (Aug. 29 high) and 1.2600 (psychological level/50-DMA). On the flip side, supports are located at 1.2340 (Friday's low), 1.2300 (psychological level) and 1.2220 (Jun. 17, 2015, low). The RSI indicator on the daily graph is moving higher towards the 50 mark, suggesting that the pair's recovery could continue in the near-term.