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Fundamentals

Following the easing of the downtrend last week, the USDCAD started the new week with a positive tone, supported by buying interest at lower levels during the Asian and European sessions on Monday. Investors are now looking forward to another wave of price increases after the release of U.S. and Canadian employment data this week.

All eyes will be on the labor market data this week. Although the Canadian labor market remains exceptionally tight, job vacancies have been declining, down 21% from the peak in April. The unemployment rate saw a slight increase in May, the first since August 2022.

Meanwhile, the rate of workers quitting has been slightly decreasing. Nearly half of businesses still consider labor shortages as a primary obstacle to their sales or production, and we expect a gain of 20,000 jobs in June. However, with population growth also surging, this is not enough to prevent the unemployment rate from rising again to 5.3%.

The June employment report in Canada will be the final major economic data released before the Bank of Canada's meeting on July 12, where they will consider whether to raise rates again in July. We expect an additional 25 basis point rate hike from the Bank of Canada.

Despite signs of a softening labor market, the unemployment rate remains historically low. Inflation has been easing but at a slow pace, while consumer spending remains robust. The delinquency rate on consumer loans has been increasing due to the lagging impact of early rate hikes, and household debt servicing will continue to rise. However, the economic momentum may be too strong for the Bank of Canada to change direction at this time.

Additionally, the Fed will also focus on June employment data this week. Following the decision to hold off on rate hikes in June, they may raise rates by 25 basis points at this meeting. The weakness in the job market is starting to show as the U.S. unemployment rate saw a slight increase in May.

Nevertheless, we expect the U.S. unemployment rate to rise again in June but remain at 3.8%, still historically low. Given the tight labor market and strong inflation pressures, it is unlikely that the Fed will raise rates again after the July meeting.

Technical Analysis

The USDCAD declined by more than 2.3% in June, marking its worst monthly performance since 2021. However, despite this, the downtrend in the weekly timeframe has slowed down, giving the bulls some hope. Both the RSI and MACD indicate convincing improvements, suggesting that the currency pair may experience a decent rebound.

If the bulls manage to break above the 20-day SMA, the price could potentially rise directly to the nearly flat support trendline at 1.3350, which has been in place since November 2022. The 50% Fibonacci retracement of the 1.4667-1.2006 downtrend adds additional resistance within that range. Therefore, if the price successfully moves higher and breaks another resistance level at 1.3380, it could provide an additional push for the bulls, potentially triggering the 50-day SMA (currently at 1.3420). If that resistance is proven to be weak, the recovery momentum could accelerate towards the 200-day SMA (currently at 1.3500).

On the other hand, the USDCAD could decline towards the previous starting point of the uptrend at 1.3180. If the price continues to move lower, it may test the restricted area at 1.3139 before triggering the June low at 1.3116. If the bears decide to break below that level, it could threaten the downtrend and extend the momentum towards the 1.3055-1.3000 range, which includes two crucial ascending trendlines starting from the 2021 low point and the 38.2% Fibonacci level.

Overall, the USDCAD is expected to maintain its recovery momentum, but before that, the bears should ideally return to the 1.3180 level before pushing the currency pair higher. In terms of strategy, buying the dips should be the primary approach.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.3200

Target Price: 1.3500

Stop Loss: 1.3100

Valid Until: 2023-07-17 23:55:00

Support: 1.3208, 1.3180, 1.3116

Resistance: 1.3288, 1.3340, 1.3389