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Summary: The Canadian dollar hovered around 1.3570 against the US dollar during the Asian and European sessions on Monday, attempting to continue to recover from Friday's losses on the back of upbeat August employment data figures released by Canada. Nonetheless, the US dollar is still under downward pressure against the Canadian dollar.

Fundamentals

Last Friday, data released by Statistics Canada showed that employment in August increased by 39,900, well above the expected 15,000. The unemployment rate remained unchanged at 5.5%, lower than the expected 5.6%, stabilizing after three consecutive months of increases. Despite the persistently high unemployment rate, this indicates the underlying strength of the Canadian economy. The employment rate dropped by 0.1% to 61.9%.

Average hourly wages increased by 4.9% year-on-year, slightly lower than July's 5.0%. Total hours worked increased by 0.5% month-on-month and 2.6% year-on-year.

Subcomponent data reveals that despite the Bank of Canada raising key overnight rates ten times since March 2022 to cool down the economy, the labor market has remained resilient. Full-time positions increased by 32,200, while part-time positions increased by 7,800. So far this year, the country has been adding an average of 25,000 new jobs per month.

Market observers noted that Canada's employment situation in August exceeded market expectations, with faster wage growth suggesting that there is still some "gas" left in the "jobs machine," even as the economy slows down. Furthermore, rising worker compensation reflects continued labor market tightness, with wage growth accelerating to 5.2%, surpassing the expected increase of 4.7% and higher than the 5% from a month ago. However, these data still indicate that the labor market is looser compared to last year. In August, population growth outpaced employment growth for the seventh consecutive month, resulting in a 0.1 percentage point drop in the employment rate to 61.9%. This marks the seventh consecutive month this year where population growth has exceeded employment growth.

In recent years, the estimate of the output gap has been significantly revised as policymakers have been trying to account for the impact of supply shocks, making the unemployment rate a more important indicator of the degree of economic weakness. At its current rate, unemployment is still modestly below levels that brought wage growth consistent with a 2% inflation target pre-pandemic. This is evident from the strong wage growth seen in the August report, with an acceleration to 5.2% year-over-year from 5.0%, coming in contrast to consensus expectations for a slight deceleration. As such, even though the Bank is still likely done with its interest rate hiking cycle, the August employment data aligns with the view that rate cuts have not yet appeared.

Technical Analysis

After eight consecutive weeks of weekly gains, the bullish momentum in the USDCAD pair entered a significant correction phase at the start of this week. The current price retracement aligns with our expectations from last week.

Given that the retracement has occurred rapidly and arrived three trading days ahead of schedule, it is expected that the potential for further upside will also be relatively extended in terms of timing. This implies that the asset may form a prolonged consolidation structure during the second bottom of the "W" pattern. If this structure does not break below the previous low at 1.3489 during the next three days of trading within the range, it could signify the formation of a "three-drive" pattern, suggesting a potential continuation of the upward trend.

As shown in the chart, despite facing double resistance from both the upper and lower trendlines, the market is bound to test our target endpoint above 1.3800 as long as the price doesn't break below the previous lows and continues to establish higher highs.

On the other hand, a decisive break below the key supports at 1.3489 or 1.3474 would make the bullish trend a thing of the past.

Overall, despite a significant retracement in the USDCAD pair during the first trading day of a new week, the bulls remain in control, as long as key support levels are not breached, and the bullish momentum remains intact. In terms of trading strategy, buying the dips is recommended.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.3560

Target Price: 1.3839

Stop Loss: 1.3470

Valid Until: 2023-09-25 23:55:00

Support: 1.3556, 1.3517, 1.3474

Resistance: 1.3609, 1.3646, 1.3694