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Abstract: The USDCAD welcomed fresh buying on Wednesday and climbed to a four-day high above 1.3400 in the early European session. At present, the spot price seems to have been recognized above the technically significant 200-day SMA and supported by a combination of factors.

Fundamentals

With inflation in Canada weakening further and the possibility of another Fed rate hike soaring, the upward trend, mainly towards USD-dominated currencies, looks to be favored.

The Canadian consumer price index released on Tuesday confirmed that the Bank of Canada (BOC) will keep interest rates unchanged at 4.5%. As the market expected, the overall CPI rose by 0.5% in the three months. In addition, the overall annual inflation rate slowed to 4.3%, which was in line with market expectations. The core CPI excluding energy and food prices fell to 4.3% from the previously released 4.7% but was still higher than the expected 4.2%.

Inflation continued to move in the right direction in March, supporting the BOC's interest rate decision last week. As we recently expected, we expect core inflation to continue to fall below 3% in the second half of this year, as does the BOC.

However, the persistently high demand-sensitive service inflation or core inflation indicates that the challenge facing the governor of the BOC when he talked about going all the way back to 2% is still quite daunting. This suggests that the BOC needs to be alert to inflationary pressures and may need to raise interest rates again if domestic economic momentum does not cool as expected.

The USDCAD gathered momentum during the Asian session on Wednesday and pushed the spot price above its technically important 200-day SMA early in the European session as a combination of factors put heavy pressure on the CAD amidst the gathering momentum.

The USD pulled out of selling pressure on Wednesday after weakening against major currencies on Tuesday. In the absence of significant U.S. macroeconomic data, the rise in U.S. Treasury Securities yields appears to be helping the USD beat its main competitor. In addition, the rise in the USD as part of the rate hike (a shortening of the rate hike cycle in May) benefited from sluggish market sentiment.

Despite the decline in U.S. (crude oil) inventories and strong economic data in China, oil prices fell to monthly lows amid fears that higher borrowing costs would slow economic growth and curb energy demand. In addition, signs of cooling consumer inflation in Canada have weakened the commodity-linked CAD.

Technical Analysis

The USDCAD rose sharply on Wednesday, reversing the previous day's decline and rising strongly after breaking through key upward resistance; As a result, the USDCAD continued its (weekly timeframe) upward momentum after a significant decline in the previous week.

In other words, the combination of bulls' breakthrough of the 200-day SMA, the downward trend since March 24, and the asset's convergence with the 23.6% Fibonacci retracement that fell between October and November 2022 highlighted the breaking of the key upward resistance of 1.3400. This means that it may continue upward in the later period.

If the closing price of the asset successfully stands above the threshold of 1.3400, the possibility of a monthly high is not excluded, which is currently approximately 1.3555. Thereafter, bulls will return to the target highs of 50% and 61.8% Fibonacci retracement levels.

Nevertheless, the asset's current pullback is still uncertain unless the asset remains above its upward support line of 1.3330 since early February; After that, the possibility of falling near the annual low of 1.3260 set in February was not ruled out.

Overall, the asset is currently rallying as expected but beware of bear-covering as the rally is gaining momentum too quickly. It is recommended to buy at the lows.

Trading Recommendations

Trading direction: Long

Entry price: 1.3400

Target price: 1.3600

Stop loss: 1.3225

Deadline: 2023-05-03 23:55:00

Support: 1.3422, 1.3395, 1.3344

Resistance: 1.3447, 1.3488, 1.3512