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Abstract: Canada's economy shrank unexpectedly in the second quarter, consumer spending slowed sharply and residential investment collapsed. Coupled with the cooling of the labor market, this should alleviate the Bank of Canada's (BOC) concerns about inflation and lead to the decision to keep interest rates unchanged on September 6. After raising interest rates by 425 basis points, the BOC may think that it has done enough to bring inflation back to the target level in the medium term, although CPI did pick up last month. The market now expects the BOC to suspend interest rate hikes next week, but it will open the door for the resumption of interest rate hikes.

Fundamentals

Statistics Canada shows that Canada's GDP unexpectedly shrank by 0.2% in the second quarter.

Statistics Canada said that the quarterly economic slowdown was mainly due to the decline in real estate investment, the decrease in inventory accumulation, and the slowdown in international exports and household spending. The monthly GDP rate recorded in June was -0.2% with the wholesale trade being the biggest drag. Statistics Canada also pointed out that wildfires in Canada have adversely affected many industries, including mining, quarrying, and railway transportation.

Market observation: Canada's economic growth in the second quarter is much lower than the BOC's forecast, but these data seem to be temporary. Statistics Canada highlighted the impact of wildfires on many industries, as well as technical problems and personnel shortages at airports. There have also been strikes in British Columbia's ports, floods along Canada's east coast, and other weather influences may also have put pressure on economic growth.

As these shocks ease, growth should rebound. The basic details show that economic growth will be stronger after controlling various distortions. This may be a great relief to the BOC, which may say that "monetary policy is still working".

The BOC will be the next major central bank to convene a meeting this week. After raising interest rates by 25 basis points to 5.0% twice during the summer, according to the money market pricing, this month may make the market return to the wait-and-see state again.

Although the overall inflation has rebounded recently, compared with the major central banks, the BOC is still closer to the target range of 1.00-3.00%, and set aside some time for more observation after the disappointing GDP growth data in the second quarter.

Despite this, investors now expect to raise interest rates again before the end of the year, but the probability is about 20%; At the same time, they also expect to cut interest rates in a year.

There is also uncertainty about whether inflation will continue to ease to the BOC's price target. As a result, the CADUSD could regain some lost ground if the BOC supports another rate hike, although policymakers would also need to downplay rate cut expectations to achieve a meaningful rebound. In this case, investors should keep an eye on whether the 1.3460-1.3530 support range can remain firm.

Technical Analysis

Ahead of the BOC's interest rate decision to be announced on Wednesday, the USDCAD hit a fresh five-month high of 1.3670 on positive buying around the 20-day SMA of 1.3520. Meanwhile, the Relative Strength Index is fluctuating within a bullish 60-80 range, showing no signs of oversold and divergence.

For more upside, the bulls need to break decisively above the integer resistance at 1.3700, which would open the door for further gains to 1.3750 and the March 27 high near 1.3800.

On the other hand, a break below the September 1 low of 1.3490 zone could take the USDCAD towards the August 15 low of around 1.3440, followed by the July 7 bottom of 1.3387.

Overall, the USDCAD continues to follow reversal signals in the uptrend after it formed an inverted hammer in the 4H timeframe. The short-term target objective could be 1.3700. Next, the price could break resistance and test our target of 1.3750. but a pullback to 1.3570 before the rise cannot be ruled out. It is recommended to buy the dips.

Trading Recommendations

Trading direction: Long

Entry price: 1.3590

Target price: 1.3750

Stop loss: 1.3470

Deadline: 2023-09-19 23:55:00

Support: 1.3605, 1.3576, 1.3518

Resistance: 1.3670, 1.3700, 1.3750