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Abstract: The Canadian dollar in the second half of the year will be unlikely to be as good as the first half. In the absence of a boost in interest rates, the outlook for the loonie will increasingly depend on commodity prices.

Fundamentals

Among the G10 major currencies, the Canadian dollar performed moderately in the first half of the year. However, the loonie could be in trouble in the coming months, as the Bank of Canada will be keen to keep interest rates cautious. In addition, the slowdown in global economic growth is expected to weigh on commodity prices, which could make a dent in Canada's terms of trade, leading to a weaker Canadian dollar.

In the first half of 2023, the CADUSD performed excellently among major currencies, ranking fifth. One of the main drivers of the appreciation of the Canadian dollar in the first half of the year was the significant tightening of interest rate differentials between Canada and the United States.

However, as inflation trends in Canada now accelerating, the Bank of Canada is unlikely to overtake the Fed in summer rate raising. This will weigh on the yield of Canadian bonds relative to US bonds, which could boost USDCAD.

Technical Analysis

USDCAD has been in a steady downtrend since late May, when it broke below a series of higher lows linked to the rising series of November 16 last year, forming a lower downward structure of lows. However, USDCAD has gained a foothold at the 9th-month bottom at 1.3116 and bounced higher to challenge the ascending trend line at the higher lows.

However, as upside resistance grows gradually stronger, the impetus of the bullish is under significant downward pressure. Nonetheless, current momentum indicators indicate the trend of recent risks are tilted to the upside. Specifically, the RSI is smoothly above the neutral line at 50, while the Stochastic is trading positive in the overbought zone at 80.

If the price extends the uptrend above the trend line and MA50, the initial resistance will again challenge the level at 1.3470. A break above 1.3388 could put USDCAD on the face of an April peak of 1.3666 or even higher. The focus of the market may turn to the psychological mark of 1.3700, which remained firm in December 2022.

Alternatively, if the recovery falters and the price plunges again, the May support at 1.3319 will dampen any downside attempts. A break below this area could trigger a pullback to last September's low of 1.2989.

Overall, USDCAD has been in the recovery stage after falling sharply and stopping at new lows in 2023. In order to resume the rally, the price will need to recover the MA50, grabbing a chance to the upside again, but how far it can go is unknown. Therefore, investors are advised to mainly go long at lows.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.3280

Target Price: 1.3500

Stop Loss: 1.3110

Valid until: 2023-07-25 23:55:00

Support: 1.3231/1.3204/1.3158

Resistance: 1.3306/1.3351/1.3391