Home Stocks Currency Pair of the Week: USD/CAD

Currency Pair of the Week: USD/CAD

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The US releases CPI this week. After last month, everyone knows the Fed will be watching. Throw in a BOC which is likely to hike 75bps, and USD/CAD will be volatile.

US economic data ended last week on a strong note, with Non-Farm Payrolls for June at +372,000 vs an expectation of +268,000 and a May reading of +384,000.  The Unemployment Rate remained unchanged at 3.6%.  The Fed should be happy with this number, as it shows that the labor market is still tight as the Fed considers how much it should raise rates at its next meeting.  That decision may be made a little easier this week when the US releases June’s CPI print.  Expectations are for a rise to 8.8% YoY vs a May reading of 8.6% YoY.  If the reading comes in as expected or higher, it may cement a 75bps at the FOMC meeting later this month.  Recall last month that it was after the CPI print and the Michigan Inflation Expectations were released that the Fed decided to increase rates by 75bps instead of 50bps.  Speaking of which, later this week the US will also release the Michigan Consumer Sentiment Preliminary reading for July, along with the Inflation Expectations.  This may also help to cement or sway the Feds decision at the next meeting.  Rounding out the US economic data is June Retail Sales on Friday.  Expectations are for a headline print of +0.8% MoM, however a 0% reading for ex-Gas and Autos.

The Bank of Canada meets on Wednesday this week at its July interest rate decision meeting.  Expectations are that the BOC will hike rates by 75bps to bring rates to 2.25%.  Recall that at the previous meeting, the BOC hiked rates by 50bps and said that it sees higher risks that the elevated inflation could become entrenched. Since the last meeting, Canada released June’s CPI data, with the headline print rising from 6.8% YoY in April to 7.7% YoY in May, much higher than the Bank of Canada’s 2% inflation target! Canada will release June’s CPI data next week. Some may point last week’s June Employment Change and argue that the -43,200 print may be a cause to only hike 50bps, however most of the loss in jobs was due to part-time job losses (-39,100), while full-time job losses were much less (-4,000).  The Unemployment Rate also fell from 5.1% in May to 4.9% in June.  Watch for wording in the Monetary Policy Report to see how much higher the BOC expects inflation to rise.  This may determine how much the BOC hikes at its September meeting.  Markets are currently pricing in a 50bps to 75bps hike for September.

From November 2021 until recently, USD/CAD had been confined to trading between 1.2454 and 1.2964.  In mid-May, the pair briefly broke above the range to a high of 1.3077, however quickly pulled back into the range, setting up a head and shoulders pattern.  USD/CAD traded to a low of 1.2525, reaching the 78.6% Fibonacci retracement to the target of the pattern, and then reversed. Since then, USD/CAD has been moving higher and is currently trading on both sides of the upper trendline of the range.  In addition, the psychological round number of 1.3000 area is proving to be a bit of a struggle as price tries to clear the zone.  In trying to move higher, USD/CAD has formed a pennant formation with a target of near 1.3400.

Source: Tradingview, Stone X

On a 240-minute timeframe, USD/CAD has broken out of the pennant formation and has come back to test the top trendline.  The pair pulled back to the 61.8% Fibonacci retracement level from the low to high of July 5th, near 1.2935.  Resistance above is at the highs of July 5th near 1.3083.  Above the recent highs, there is no significant resistance until 1.3371, which is the highs from the week of November 2nd, 2020.  Support is at the July 8th lows near 1.2936, then the downward sloping, top trendline of the pennant near 1.2895.  If price breaks below there, it can fall to the lows from July 5th, near 1.2843.

Source: Tradingview, Stone X

The US releases CPI this week. After last month, everyone knows the Fed will be watching.  Throw in a BOC which is likely to hike 75bps, and USD/CAD will be volatile.  The key to the next direction of the pair may be if CPI misses expectations or the if BOC is less hawkish than expected!

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