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Summary: The USDCAD continued to gain traction on Friday, holding above the 1.3520 range during the early European session. The asset is currently trading around 1.3540, down 0.02% for the day. Nevertheless, the upward trend remains intact.

Fundamentals

Recent data has reinforced the case for the Fed to raise interest rates again, as the U.S. economy strengthens. On Wednesday, the Federal Open Market Committee (FOMC) minutes emphasized that inflation remains uncomfortably high, potentially requiring further tightening of monetary policy to achieve long-term inflation goals. This, in turn, boosted the USDCAD exchange rate.

Furthermore, concerns about a potential collapse in China's real estate market have attracted safe-haven (USD) buying.

According to Reuters, China's second-largest property firm (Evergrande Group) filed for bankruptcy in a U.S. court under Chapter 15 of the U.S. bankruptcy law on Thursday. This escalated worries about the deteriorating Chinese economic situation and led to further declines in global stock markets. Notably, Evergrande Group is the world's most indebted property developer and has become a major catalyst for the Chinese real estate crisis.

Additionally, the adverse effects of rapidly rising borrowing costs have weakened oil demand. This, in turn, has weighed on the commodity-linked Canadian dollar, indicating that the path of least resistance for the USDCAD is upward. Thus, any significant corrective declines might still be seen as buying opportunities on dips. With no relevant economic data from the U.S. or Canada influencing market trends, the downward potential remains limited.

The USDCAD has been trading within an ascending trend channel since August 10th. The current momentum appears favorable for further upside, as the asset remains above the 50-hour and 100-hour Exponential Moving Averages (EMA) and is in an upward trend. Meanwhile, the Relative Strength Index (RSI) is above 50, keeping the upward momentum active.

Currently, the immediate resistance for the USDCAD upward structure is at 1.3550. The next noteworthy resistance is the upper limit of the ascending trend channel at 1.3570. Any subsequent buying pressure above the latter would extend the rebound momentum toward the psychological level of 1.3600, followed by the high of May 25th at 1.3640.

On the downside, 1.3520 is considered initial support. The key battle level sits at 1.3500, and further down, the next notable level to watch is the low of August 16th at 1.3475, ultimately followed by the low of August 11th at 1.3410.

Technical Analysis

After touching a 10-month low of 1.3091 in mid-July, the USDCAD has been on an upward trajectory. Additionally, the asset has broken through important technical levels including the 50, 89, 100, and 200-day SMAs. In today's trading, it reached a 2-month high of 1.3558, further deviating from the fair value of 1.2902. Nonetheless, we still believe that there is a possibility for the fair value to return before the stop-loss level of 1.3670 is triggered.

The current momentum indicators for the USDCAD suggest that the recent rebound might be overextended. Specifically, the MACD remains strong above the zero line, with its fast line at its highest level since March, while the RSI hovers within the overbought territory around 70.

If the bulls manage to breach the critical resistance at 1.3550, it could test the April peak of 1.3670. Breaking above the latter level, the currency pair might rise to the psychological level of 1.3700, which held firm in December 2022. Further upside potential could halt at the 2023 high of 1.3860.

Alternatively, if the recent upward momentum fades, prices could retract to the support level at 1.3372. Breaking below this level could open the door to the April bottom of 1.3300. If the bears fail to halt at this point, the asset might return to the fair value of 1.2902.

Overall, the USDCAD has been experiencing a robust rebound, accelerating after breaking the upward trendline connecting the higher lows from November 2022 to early May. However, due to the proximity to overbought conditions, the possibility of a correction shouldn't be ruled out. Nevertheless, as prices are still within an ascending channel, the current trend remains upward. In terms of trading strategy, buying the dips is recommended.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.3540

Target Price: 1.3670

Stop Loss: 1.3410

Valid Until: 2023-09-01 23:55:00

Support: 1.3501, 1.3440, 1.3372

Resistance: 1.3561, 1.3584, 1.3650