US dollar outlook: analyzing the dollar dip for USD/CAD and USD/ZAR

Dollar dip unlikely to persist – USD fundamentals remain strong

The US dollar basket (DXY) – a benchmark for dollar performance against select major currencies – trades lower this morning, continuing yesterday’s decline. The pullback appears more than a week after the index put in 9 consecutive green trading days, bringing DXY from 97.70 to 100.

The DXY’s decline is largely attributed to the recent rise in EUR/USD – which makes up 57.6% of the index - as the end to accommodative monetary policy is likely to occur at the end of Q2 with a first rate hike anticipated in early Q3. What does this mean for the dollar?

The dollar still boasts very strong fundamentals, with an aggressive rate hike timeline as we could see multiple 50 basis point moves in a number of Fed meetings this year, starting early next month. In fact, market expectations are currently pricing in just shy of three 50 basis point hikes starting in the May meeting. In addition, the FOMC has begun discussions on the balance sheet reductions and is likely to provide more information on this in the May meeting.

However, earlier this week the IMF lowered its global growth forecasts in light of the war in Ukraine and inflationary pressures that have been exacerbated by the conflict. Potential economic headwinds may slow the pace and size of future rake hikes but such challenges are unlikely to derail the Fed's hawkish objectives for now.

DXY trades around the psychological 100 mark where it may find short-term support before launching higher. A break below 100 brings 99.40 into focus as the nearest level of support.

US dollar basket (DXY) daily chart

USD/CAD drops after hot Canadian inflation print

Yesterday, Canadian headline inflation obliterated estimates of 6.1%, ultimately coming in at 6.7%. In the current inflationary environment, upward surprises have been commonplace however, a 0.6% beat is rather sizeable and the markets agreed.
USD/CAD dropped yesterday and is slightly lower in the early London session. The Bank of Canada (BoC), much like the Fed, is implementing aggressive rate hikes in an attempt to lower inflation. The recent dollar pullback now sees USD/CAD at an interesting zone of around 1.2460. This level has supported the pair for most of this year, with occasional breaches proving to be brief.

The threat of a potential death cross may support further selling if we see a hold below 1.2460 with follow-through. Resistance appears to be all the way up around 1.2645, the 23.6% Fib of the major 2020 decline.

USD/CAD daily chart

Impressive ZAR unwinds despite a weaker dollar

While emerging makret currencies like the rand and major currencies like the CAD aren't directly comparable, it is interesting to analyze the recent price action of the two commodity currencies in light of a softer dollar.

Headline inflation in South Africa came close to the upper side of the 3% - 6% target band yesterday at 5.9% which had little to no bearing on the recent USD/ZAR turnaround. The rand had enjoyed a prolonged period of strength, boosted by soaring commodity prices, mainly: gold, platinum and iron ore which have stabilized to some degree.

The move was rather surprising as commodity prices are still elevated and the dollar appears softer in the last 48 hours. In local news, the SA president declared a state of disaster in the coastal province of KwaZulu-Natal in light of the recent flooding, estimated to have caused R5.6 billion worth of damage, just to transport infrastructure. USD/ZAR resistance all the way at 15.50 with support coming in at 15.00 flat.

USD/ZAR daily chart

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