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Summary: The Canadian dollar showed some bullish momentum last Friday, pushing the USDCAD lower towards the 1.3600 region. Better-than-expected retail sales reports and a broad recovery in market risk sentiment boosted the Canadian dollar, while the US dollar softened at the close of the trading week.

Fundamentals

Despite high interest rates constraining household budgets, Canadian household spending unexpectedly rebounded. Data released by Statistics Canada revealed a 0.6% month-on-month increase in retail sales for September, far exceeding the market expectation of 0%. Sales in four out of nine subsectors showed growth, with the largest increase seen in sales for auto and auto parts dealers, rising by 1.5% in September.

Retail sales excluding automobiles also grew by 0.2%, contrary to an expected decline of 0.1%. Although the overall data rebounded significantly, the details in the report indicate that consumer spending remains somewhat subdued.

Core retail sales, excluding gas stations and auto dealers, declined by 0.3% in September. The main contributors to the decline were sales from sporting goods, hobby, and musical instrument retailers, as well as beer, wine, and liquor stores, indicating that consumers cut back on some non-essential purchases.

Bank of Canada Governor Tiff Macklem suggested that policymakers may have done enough to tame inflation. This statement reinforced the market and economists' expectations that interest rates may have peaked.

Macklem anticipates continued economic softness in Canada over the next few quarters, suggesting that inflation will face greater downward pressure. He believes that monetary policy tightening is effective, and interest rates may now have enough restraint to bring prices back to stability. However, he reiterated that the central bank is prepared to raise rates again if high inflation persists.

Following the release of the September retail sales report in Canada until the close, the USDCAD challenged the 1.3600 level, targeting the 1.3500 level directly. Currently, the market is retesting 1.3650, but overall sentiment remains firmly controlled by bears.

Technical Analysis

The USDCAD is currently hovering within the downward-sloping 20-day and 50-day SMAs but remains above the mid-term uptrend line. The asset found support near the 1.3655 level, and the bearish correction may be coming to an end.

Technical oscillators are showing signs of weakening bearish momentum. The MACD is slightly below its trigger line and zero line, while the RSI is below the 50 level and preparing for an upward crossover, indicating a potential bullish trend in the coming trading days.

However, during Friday's trading, the USDCAD not only broke below the consolidation of the triangle pattern but also breached the upward trend line connecting lows since mid-July. This suggests that, even with a short-term retracement, it may not evolve into a reversal of the trend. Further downward movement could open the path to the obstacle at the October 10 low of 1.3565 and then challenge the 200-day SMA at 1.3520.

Overall, the USDCAD shows signs of short-term recovery, but the mid-term trend has broken the pattern of setting higher highs and higher lows since July 14, indicating a shift to the downside in the future. In terms of trading, the recommended strategy is to go short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 1.3700

Target Price: 1.3453

Stop Loss: 1.3820

Valid Until: 2023-12-11 23:55:00

Support: 1.3595, 1.3556, 1.3515

Resistance: 1.3665, 1.3692, 1.3712