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Abstract: After the release of the consumer price index in Canada in July and retail sales data in the U.S. in July, the USDCAD fell sharply. The USDCAD fell from 1.3505 to 1.3445. The increase in retail sales in the U.S. in July exceeded expectations, offsetting the positive impact on the CAD.

Fundamentals

Inflation in Canada, measured by CPI, accelerated by 0.6% in July, twice the expected 0.3% quarter-on-quarter increase. This increase is a big jump from the 0.1% increase in June, which is mainly affected by the increase in tourism prices.

On a year-on-year basis, the CPI rose by 2.8% to 3.3% in July, exceeding the expected 3.0%. A significant factor behind the rapid rise of overall consumer inflation is the base year effect of gasoline prices. In July 2022 last year, the price of gasoline dropped sharply (-9.2%), which no longer affects the current 12-month trajectory.

Excluding gasoline, CPI rose by 4.1% year-on-year, slightly higher than the 4.0% in June. Excluding the energy factor, CPI rose by 4.4% year-on-year in June and then fell back to 4.2%.

The median CPI slowed down from 3.9% year-on-year to 3.7%, which was in line with expectations. CPI was lowered from 3.7% to 3.6%, which was higher than the expected 3.5%. The general consumer price index also fell from 5.1% year-on-year to 4.8%, lower than the expectation of 5.0% year-on-year.

Following the release of the data, money markets put the likelihood of the Bank of Canada raising interest rates in September at 35%, up from 22% before the inflation data was released.

Canada's inflation rebounded to above the control range of the Bank of Canada in July, but the weakening of core indicators indicates that the momentum of price pressure has cooled down. These data highlight that the current inflation struggle is facing challenges after the favorable base effect ends.

In recent months, the base effect has helped slow down Canadian inflation. The re-acceleration of the overall inflation rate in July was mainly due to the price of gasoline because the sharp monthly decline a year ago no longer affected the trend of 12 months. Canada's latest inflation data shows that core inflation is cooling down, coupled with recent signs of economic and labor market weakness, which will pave the way for the Bank of Canada's policymakers to suspend interest rate hikes again at their next meeting on September 6.

Technical Analysis

The USDCAD bulls are showing their best monthly gains since February, with the bulls' rally from 1.3370 this week helping to keep the USDCAD in the rising zone. However, with the RSI approaching the overbought threshold of 70 and the stochastic oscillator already starting to turn down, a pullback in the market now looks more likely.

However, it may reduce the negative risk if the bulls are significantly higher than the rising channel, but only by continuously rebounding above the range of 1.3500-1.3535 (including the 50% Fibonacci retracement of the downward trend of 1.3976-1.3115) can the buying confidence be enhanced. If such a rebound becomes a reality, the rising speed may accelerate to the 61.8% Fibonacci level of 1.3640. In addition, bulls also hope to see a lasting upward trend above the resistance line of 1.3730 in 2020 to reverse the bearish reversal caused by this resistance line.

If the USDCAD stops at 1.3500, the decline may test the support of 1.3370. Breaking through this level may continue to extend to the 23.6% Fibonacci retracement of 1.3300 and the 20- and 50-day SMAs. If bears dominate, the price may drop sharply to the bottom of 1.3120-1.3145.

Overall, the USDCAD is likely to take profits from long positions in the coming sessions as the ongoing bullish wave in prices is about to reach the upper limit of the (medium-term) bearish channel. It is recommended to go short at the highs.

Trading Recommendations

Trading direction: Short

Entry price: 1.3530

Target price: 1.2934

Stop loss: 1.3653

Deadline: 2023-08-29 23:55:00

Support: 1.3439, 1.3376, 1.3308

Resistance: 1.3505, 1.3533, 1.3562