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Abstract: Canada recorded a monthly CPI rate of 0.1% in June, the smallest increase since December 2022. The money market thinks that the possibility of the Bank of Canada (BOC) raising interest rates in September is 22%, which is lower than 25% before the inflation data is released.

Fundamentals

According to data released by Statistics Canada today, the annual CPI in Canada dropped to 2.8% in June, which was the lowest level in 27 months, and it was within the control range of the BOC for the first time since March 2021, but food prices were still at a high level.

The monthly rate of CPI rose by 0.1%, which was also lower than the expectation of 0.3%. The price of gasoline, which caused the economic slowdown, decreased by 21.6% compared with June 2022, and the price of food increased by 9.1% year-on-year, slightly higher than the increase in May.

The sub-indicators show that the price index of industrial products in Canada continued to fall in June, and the prices paid by enterprises for raw materials fell, further indicating that the price pressure is easing. The industrial product price index decreased by 0.6% compared with the previous month, which was the third consecutive month of decline.

The BOC's preferred core inflation indicator shows that potential price pressure still exists. Core service inflation, excluding housing inflation, also fell only a little in June, to 4.8%. Therefore, overall inflation is likely to accelerate again in the next few months, and some recent progress in inflation reduction can be regarded as a one-off.

The BOC said last week that it expected the inflation rate to remain at around 3% next year and to fall to its target of 2% by mid-2025, six months later than previously expected.

The CAD will continue to struggle after the overall inflation rate in Canada is lower than expected. Interest rate swaps show that traders bet that the BOC's interest rate will remain near the current target of 5% at least until its next meeting in September. In the past five days, the CADUSD performed the worst, rising by only 0.2%.

The USDCAD moved higher on the back of this data, but some of this move was due to a strong U.S. retail sales report released at the same time and a broadly stronger USD.

Technical Analysis

Facts have proved that the recovery of the USDCAD is short-lived because the USDCAD has been in a state of substantial adjustment in the past five trading days. At present, it is hovering in the busy range of 1.3093-1.3387, and bears continue to be keen to create a series of lower highs and lows in the near future.

The continued convergence of the 100- and 200-day SMAs supports the possibility of another sharp move, but bears must keep an eye on momentum indicators for clues to the next move.

As the Average Directional Index (ADX) does not support the current downtrend and is still pointing to range-bound market trading, the focus turns to the stochastic oscillator. The indicator is currently playing with its SMAs and its next move could send a strong signal as to where USDCAD may go next.

If Stochastic manages to break below the SMA, bears will be more confident of breaking below the previous low of 1.3093 and will then be able to target the 61.8% Fibonacci retracement at 1.3003.

If the bears test the previous low of 1.3093 without breaking it and rebound higher, the bulls may try to make another small move higher. the 1.3300-1.3314 range is unlikely to give them too much trouble, but the busier 1.3368-1.3375 area will be the real challenge. This area consists of a 38.2% Fibonacci retracement and a 50-day SMA. A successful break would open the door to a retest of the key range of 1.3481-1.3504.

Overall, bears are still keen to make another lower low, but their fate lies in the hands of the stochastic oscillator. The bulls are expected to regain their confidence on the upside in the current situation where the previous lows are not broken. It is recommended to buy the dips.

Trading Recommendations

Trading direction: Long

Entry price: 1.3150

Target price: 1.3462

Stop loss: 1.2950

Deadline: 2023-08-01 23:55:00

Support: 1.3131, 1.3093, 1.2996

Resistance: 1.3243, 1.3305, 1.3386