FX Watch: USD/CAD stabilises, while USD/JPY struggles

September kicked off with a limp in global markets

September is off to a rough start for global markets, as growth fears are revived by another poor read from the US Institute for Supply Management (ISM) manufacturing Purchasing Managers' Index (PMI). That seems to bring back memories of the early-August sell-off, as market participants are once again back to contemplate the soft landing debate. The economic calendar ahead are laid with a series of US labour market data, with any economic vulnerabilities presented in the data likely to further exacerbate the risk-off tone.

Nvidia took some blame for the tech sell-off as well, perhaps with optimism running dry given that it failed to rally previously despite another stellar quarterly results. Further rotation from outperforming tech to the laggard sectors may remain a theme to watch, with defensives sectors showing some resilience overnight.

USD/CAD: Found room to stabilise at upward trendline support

In the forex (FX) space, the US dollar has managed to regain some footing after its recent sell-off, as more dovish rate expectations amid weak US economic data seem to strike a balance with safe-haven flows. The USD/CAD has found near-term support at an upward trendline around the 1.347 level for now, as oversold technical conditions in the daily relative strength index (RSI) found room to revert back to more neutral territory.

A firmer move in its daily RSI above the mid-line may be needed to offer more conviction of buyers taking control. For now, some resistance may be expected at the 1.361 level, which marked its 23 August sell-off on Federal Reserve (Fed) Chair Jerome Powell’s dovish messaging.

Should the prevailing upward trendline failed to hold, we may expect the pair to head towards the December 2023 low at the 1.316 level next. Current market rate expectations are still pricing for a more aggressive rate-easing path for the US Fed as compared to the Bank of Canada, which could serve as headwind for the pair if upcoming economic data offers any validation.

USD/JPY: Still struggling to gain significant upside

Following a break below a key upward trendline back in August and a subsequent rejection (16 August), the USD/JPY has remained weak thus far. Its daily RSI has turned back lower below its mid-line, which suggests near-term downward bias in place. The Bank of Japan (BoJ) continued to lean hawkish amid higher-than-expected inflation numbers, with the continued narrowing in yield differentials likely to persist. Further downside could see the pair eye for a move to retest its 5 August low at the 141.68 level.