Bab 11 08/01 USDCAD: We Have Enough Patience to Wait for the Sell-off
Abstract: On Tuesday, the USDCAD remained above the range triangle during the European session. As the U.S. Dollar Index (USDX) rose to around 102.20, the CAD assets attracted new offers, but the potential for further upside seemed limited.
Fundamentals
During the European session on Tuesday, the S&P 500 index futures continued to decline, indicating that investors are cautious before the release of key economic data. At the same time, risk aversion continues to be forced to push up. The USDX continued its three-day upward trend, as investors expected that the Federal Reserve might continue to raise interest rates to achieve price stability.
Against the background of rising interest rates, the economic prospects of the U.S. show different performances on different parameters. Factory activity remains weak, while consumer spending and labor market conditions show flexibility. The U.S. manufacturing PMI status update in July will be closely watched.
According to the consensus, the U.S. factory activity is expected to be in the contraction range for the ninth consecutive month. The market is currently expected to be 49, which is lower than the economic expansion level of 50. In July, the ISM manufacturing PMI was higher than the previously released 46.0.
Under the guidance of the U.S. manufacturing PMI data, CAD assets (bulls) took further upward action.
Meanwhile, investors continue to wait for the July labor market data released later this week. It is estimated that 20,600 new jobs will be created in the Canadian economy data in July, down from 59,900 in June. The unemployment rate is expected to rise to 5.5%, compared with 5.4% previously announced.
The employment report is one of a series of indicators released by the Bank of Canada before its next interest rate decision (including another monthly inflation data) on September 6. The key issue is that the interest rate (currently 5% in overnight rate after raising interest rates again this year) is limited enough to curb inflation.
The GDP is still stronger than expected but is also driven by strong population growth. The growth rate of per capita GDP has slowed down significantly. The rising unemployment rate will help to reassure the Bank of Canada that the supply and demand of labor are returning to balance.
We believe that the weak job market will keep the Bank of Canada on the sidelines and will not raise interest rates further this year. Nevertheless, if inflation needs to be controlled within the target range, the Bank of Canada and major central banks will not hesitate to raise interest rates further.
Technical Analysis
Pressured by the 10-week SMA, the USDCAD was in a range for the seventh consecutive week, unable to extend the momentum of further rebound from July lows above 1.3092.
Despite the positive slope of the momentum indicator, the likelihood of a bullish continuation is also increasing. However, with the Relative Strength Index fluctuating below 50 and the MACD still in the negative zone, any improvement is likely to be short-lived in the short term. This is the key factor why the bulls have been slow to move up.
If today's price maintains its bullish trend and closes above the 20-day SMA and 1.3225, the falling 50-day SMA may first prevent the bulls from moving closer to the 1.3300 neighborhood. Then, the 1.3340-1.3380 restriction zone could delay the extension towards the 200-day SMA at 1.3455. However, only a sustained close above the broad bearish channel and a break above 1.3500 will boost the short-term outlook. Otherwise, it could turn to the downside in later trading.
While continuing lower, the market may revisit the strong support area at 1.3100-1.3145. In case of a break below that bottom, bears may immediately target the lower boundaries of the channel. While downside forces strengthened below the psychological level of 1.3000, the price may seek support around 1.2900.
Overall, the USDCAD bulls have been stubbornly pushing for a close above the 1.3225 level despite several unsuccessful attempts to move higher, the USDCAD could rebound, but stronger buying confidence is needed to break above the tough resistance area of 1.3300-1.3380. Otherwise, our view remains supportive of the downside.
Trading Recommendations
Trading direction: Short
Entry price: 1.3300
Target price: 1.2997
Stop loss: 1.3470
Deadline: 2023-08-15 23:55:00
Support: 1.3172, 1.3120, 1.3092
Resistance: 1.3287, 1.3387, 1.3462
