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Abstract: The USDCAD accelerated upward after hitting a weekly high of 1.3260 in the European session. After the consumer price report in Canada weakened in May as expected, CAD assets faced heavy selling pressure.

Fundamentals

Canada's consumer price index in May dropped to 3.4% year-on-year, lower than 4.4% in April, which is in line with market expectations. It marks that the inflation growth rate has slowed down to the slowest in the past two years, thanks to strong immigration and the improvement of the real estate market. Among them, the housing inflation rate slowed slightly to 4.7%, lower than 4.9% in April. At the same time, mortgage interest cost inflation continued to rise, rising by 29.9% year-on-year in May.

Statistics Canada points out that it is the largest single contributor to the year-on-year inflation rate. If the higher mortgage cost is not considered, the inflation rate will reach 2.5% in May.

Canada may avoid falling into recession, but economic growth will still be disappointing.

They expect GDP to shrink later this year, and point out that below-potential growth and a rising unemployment rate will ease inflationary pressure so that the core CPI will return to the central bank's target of 2% in mid-2024, which will enable the Bank of Canada to reduce interest rates to 3% next year.

So far, although families have shown resilience, with the savings rate returning to the pre-pandemic level, the cost of debt service will rise, and consumption will slow down significantly.

Before the release of the latest inflation report in Canada, no matter what the market holds, the views after the release of the report may be the same. We continue to predict that the Bank of Canada will raise interest rates next month. The overall CPI increased by 3.4% year-on-year, which was in line with market expectations, and it was 1 percentage point lower than that in April. However, the core inflation rate is still 3.7% at a three-month annual rate, even if it did not accelerate further in May. In this context, the Bank of Canada has reason to raise interest rates by 25 basis points again.

Technical Analysis

Since late May, the USDCAD has been in a steady downward trend, forming a downward structure in which high and low points are constantly moving down. In addition, when the price fell below the bottom of the symmetrical triangle pattern, the technicals further deteriorated, causing a sharp drop to a new nine-month low of 1.3116.

The current momentum indicators suggest that further downside risks are easing. Specifically, the RSI has rebounded from the oversold zone but remains deep in the negative zone, while the MACD remains below the 0-axis but the fast and slow EMAs have started to cross upward.

If the price continues to reverse upward, a series of previous support levels may become future resistance. More precisely, after breaking through 1.3270, the USDCAD may rise to 1.3326 in the previous supply area. Even higher, the support level of 1.3386 in mid-June may inhibit any upward attempt.

If the bears try to push the price lower again, initial support could be found at the recent 9-month low at 1.3116. A break below that level could take the USDCAD down to the 1.3074 level or lower, challenging the September 2022 bottom at 1.2960. Further declines to the August 2022 low at 1.2727 would then be halted.

Overall, the USDCAD has been moving sharply lower after falling below the bottom of the recent triangle pattern. The current rally is still an upward adjustment. The bulls must repeatedly confirm the recent bottom before they can gain a foothold. Looking ahead, we believe the momentum favors the bulls. It is recommended to buy the dips given that the former bottom is not broken.

Trading Recommendations

Trading direction: Long

Entry price: 1.3210

Target price: 1.3463

Stop loss: 1.2950

Deadline: 2023-07-12 23:55:00

Support: 1.3116, 1.3080, 1.2956

Resistance: 1.3287, 1.3226, 1.3387