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Abstract: The USDCAD gained strong upward momentum on Tuesday and rallied to a two-month high near 1.3500 in the first half of the European session, up 0.8% on the day to a new high since June 6.

Fundamentals

What pushed the CAD down was the continuation of last Friday's employment report. After the excellent employment report in June, the data in July was very negative. Canada's economy lost 6,400 jobs in July, while it added 59,900 jobs in June. Following the increase of 109,600 jobs in June, the number of full-time employees only increased by 1,700, which is negligible. The unemployment rate rose from 5.4% to 5.5%.

Canada's labor market continues to be loose. As the growth rate of the labor force is faster than that of the job market, the unemployment rate has risen from 5.0% to 5.5% in just three months. In 2023, the number of unemployed people increased in six out of seven months, resulting in an increase of 123,000 in the total number of unemployed people. The relaxation came after the number of job vacancies dropped by 10%.

In July, the net employment decreased and the unemployment rate increased. The unemployment rate of 5.5% was significantly higher than that of 5% in the first four months of 2023, which supported the view that the Bank of Canada is unlikely to raise interest rates again in this cycle, although the risks still exist.

The most intriguing data is the salary increase. In June, wages increased by 5% year-on-year, higher than the 3.9% in May. This increase shows that the labor market is tight and complicates the Bank of Canada's efforts to reduce the inflation rate to 2%.

Canada's July employment report highlights the view that the Bank of Canada's recent increase in inflation expectations is too radical and the result may be lower than expected. A weak job market should help narrow the country's output gap and put downward pressure on inflation, especially in the service industry.

The Bank of Canada is unlikely to change its tough tone at present. Although the possibility of raising interest rates again after the release of this report has declined, the Bank of Canada needs to see more similar situations to feel that its work has been completed. The reports in June and July are in line with our expectation that the unemployment rate will rise and the economic momentum will slow down further for the rest of this year.

Technical Analysis

Since the beginning of March, the USDCAD has been in a steady downtrend, forming a clear descending structure with ever-lower lows. However, after five consecutive sessions of rallying, the USDCAD seems to be standing firm at the 10-month bottom at 1.3092 and trying to recover more losses.

Momentum indicators support the view that the bulls continue to move higher. Specifically, the MACD is strengthening above the 0-axis, with its red signal line at its highest level since June 1, while the Relative Strength Index tested the threshold of 70.

If the price continues to rise above the increase of AB = CD, the initial resistance level may stagnate at the range of 1.3593. Breaking through this resistance, the peak value of 1.3666 in April will show up; Any subsequent increase can turn the focus to the psychological barrier of 1.3700, which will remain firm in December 2022.

Or, after the bulls completed the test of AB =CD on the momentum increase, there was a sharp retreat. Then it falls below a series of lows that constitute the upward trend line. The price fell below the previous lows of 1.3387, 1.3269, and 1.3092. Even lower, the threshold of 1.2994 can provide downside protection.

Overall, the USDCAD has been recovering modestly after a sharp decline in March that stopped at a new 2023 low. The short-term gains in price are not quite over. It is recommended to buy the dips.

Trading Recommendations

Trading direction: Long

Entry price: 1.3460

Target price: 1.3560

Stop loss: 1.3380

Deadline: 2023-08-22 23:55:00

Support: 1.3479, 1.3388, 1.3318

Resistance: 1.3544, 1.3569, 1.3593