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Summary: USDCAD consolidated its recent strong gains to a four-week high on Thursday and appreciated to the 1.3800 level in the European session, forming a "double top" pattern.

Fundamentals

Both Canada and the U.S. will release their latest labor market data on Friday. Bank of Canada Governor Tiff Macklem and Federal Reserve Chairman Jerome Powell will closely monitor the impact of rising interest rates on the cooling economy.

In Canada, following the addition of 60,000 jobs last month, we anticipate an increase of 25,000 new jobs in July. However, the rapid population growth implies that this might not be enough to absorb all new entrants to the labor market. The unemployment rate rose slightly by 0.2 percentage points in May and June, and we expect another increase in July. The total job vacancies are also trending downward. The slowdown in wage growth in recent months is consistent with the weakening demand for workers in the economy.

With cooling labor demand and increased immigration boosting supply, recent strikes in Canada may not prevent a significant slowdown in wage growth over the next twelve months. The number of workdays lost from January to May on an annual basis is the highest since 2005, reflecting the number of federal government workers on strike rather than labor organization strikes. Importantly, wage growth for workers involved in collective bargaining has lagged in recent strikes, with wage demands primarily focused on retroactive pay increases and more moderate demands for future pay raises.

The employment report is one of several indicators released ahead of the Bank of Canada's next rate decision on September 6 (including another monthly inflation data). We believe the soft job market will keep the Bank of Canada on hold, and there will be no further interest rate hikes this year. Nevertheless, if necessary to control inflation within the target range, both Canadian and overseas central banks will not hesitate to raise rates further.

Meanwhile, the reasons for further tightening of monetary policy by the Bank of Canada remain strong, but relative rates may not be as important. As with other central banks, the outcome will depend on the data, making the July employment report, July inflation data, and June retail sales data critical focal points for the market.

We anticipate the USDCAD to decline and break below the 1.3100 support level in the coming weeks.

Technical Analysis

The USDCAD has formed a "double top" pattern in the 4-hour chart, indicating a potential reversal signal in an upward trend. If the double top pattern is confirmed, the downside target may break below the psychological level of 1.3000. Following this, the price may enter a period of consolidation. However, before the decline, the quote may need to break below the strong previous support level at 1.3100.

On Wednesday, the lower closing price of the U.S. dollar could slightly favor the Canadian dollar in the short term from a technical perspective. The USDCAD has stalled within the previous "double top" range, highlighting the limited upside potential after the recent substantial rally of the U.S. dollar. At the same time, the current technical momentum for the U.S. dollar remains bearish, and further progress is challenging. Whether the USDCAD will continue to strengthen remains to be observed.

Overall, the market's focus is on the "double top" pattern, and breaking above the previous high at 1.3390 would negate the bearish outlook. However, as we mentioned earlier, the technical backdrop does not support further upward movement in prices. In terms of trading strategy, it is recommended to go short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 1.3380

Target Price: 1.2941

Stop Loss: 1.3530

Valid Until: 2023-08-17 23:55:00

Support: 1.3245, 1.3182, 1.3097

Resistance: 1.3387, 1.3462, 1.3550