USDCAD Technical Outlook – Canada Inflation in focus

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BOC_Canada's inflation_2403

The monthly inflation data from Canada due to be released today will set an important market for the Bank of Canada. Central bank officials are expected to meet next week at the monthly monetary policy meeting.

Although no changes to interest rates are expected given that the Bank of Canada hiked interest rates only in September and for a second time, inflation data could no doubt steer the course of interest rates and forward guidance.

Competing against the euro, the Canadian dollar or the loonie has also been a strong performing currency against the US dollar. This came initially on a weaker US dollar, but the bullish momentum picked up steam after the Bank of Canada began to hike interest rates.

The tightening cycle came with BoC Governor Poloz first spoke of the central bank’s hawkish intentions in July. Since then, the BoC had hiked rates twice, beating expectations. The markets were expecting the BoC to hike rates only two times this year, with the latter expected in December. The BoC’s rate hikes were the first in nearly seven years.

However, with the September rate hike, the markets are now expecting to see the BoC to follow through with one more rate hike by end of December this year. Most interestingly, for the Canadian dollar the gains were not driven by oil price which was the trend previously.

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Despite the surprise rate hikes, however, there are signs that the BoC could potentially hold back from further rate hikes this year. This comes as economic data remains mixed.

Household spending has shown signs of staying flat while the labor market is remaining the sole bright spot. The BoC started to hike rates despite inflation not reaching the central bank’s target rate. The Bank of Canada’s core inflation rate continues to remain below its target. It was registered at 1.5% in August.

Canadian exports, which were the main driver for the Canadian economy was also showing signs of slowing having declined for three months in a row.

USDCAD – Technical Outlook

Despite the risks that inflation could remain muted that could leave the BoC on the sidelines for the next month or two, the technical outlook for USDCAD remains one that is supportive of the Canadian dollar.

Last week we saw USDCAD rallying back to the breached support level of 1.2532. This support level marked the validation of the descending triangle pattern that put the downside move towards 1.1212. However, after a brief decline below the 1.2532 support level, price action was seen quickly rallying back to reclaim or test this level.

USDCAD - Price back at support/resistance
USDCAD – Price back at support/resistance

As long as resistance is established here and we see a reversal pattern forming, the downside in USDCAD is likely to persist. The initial downside target could be seen at 1.1956 level, followed by a longer-term decline to the final target of 1.1212.

There are also signs of the hidden bearish divergence against the previously marked higher high which also validates the downside view in prices.

However, given the timeframe of the chart, USDCAD is likely to take at least a few months to complete the descent towards 1.1212. This decline will, however, come at the risk of the uncertain monetary policies, especially that of the Federal Reserve.

Currently, officials remain divided on the future course of action. However, the clouds are likely to lift in the coming months as economic data provides more insights. This is important after the September employment report was distorted by the hurricanes.

As such, while the technical point to further strengthening of the Canadian dollar, a lot will be left to be seen as far as the fundamentals are concerned.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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