This time last week the USDCAD was recording a new yearly low. This occurred after the Canadian economy announced two pieces of impressive economic data. During May, Canadian retail sales expanded by an annualized 1.1% (nearly double the initial expectations) and this correlated towards increased demand for the Canadian currency.
However, further demand for the Canadian currency was enticed by the announcement that for the first time in two years, Canadian CPI increased by over an annualized 2%. The Bank of Canada’s threshold inflation target to consider an interest rate increase stands at 2% and with Canadian CPI increasing by an annualized 2.3% in May, this has encouraged speculation that the Canadian central bank will move to raise interest rates.
As the following week progressed, the USDCAD continued to record further lows. The Canadian currency is still reaping the rewards of their impressive economic performances and as a commodity currency, it is believed their economy might be boosted by the geographical dispute in the Middle East. Of course, the USDCAD’s recent downward movement has also been aided by weaker US economic sentiment.
During the latest (18th June) Federal Reserve FOMC meeting, the US central bank downgraded their overall economic growth forecasts for 2014. The Federal Reserve openly acknowledged that the adverse winter weather period the United States encountered over the New Year had a far more detrimental impact on their economy, than they first envisaged. This automatically raised suspicions that Wednesday’s 1st quarter GDP confirmation would be worse than anticipated. Unfortunately, this proved to be the case. The US economy contracted by an annualized 2.9%. Although a contraction was expected, this is a far worse figure than anticipated (economists were predicting up to 2% contraction).
Overall, due to the current contrasting economic sentiments for these two economies, the USDCAD’s bearish momentum has continued throughout the past week. In regards to the technicals on the Daily timeframe, a bearish trend line is still in control of the pair’s direction. Since the impressive Canadian CPI (Inflation) and retail sales data was released, the pair has extended below the 1.0758 support level. The more hawkish Canadian economic optimism, coupled with the disappointing US GDP figure has encouraged the pair to use the previous 1.0717 and 1.0682 resistance levels, as support.
Possible upcoming support levels are located around 1.0646, 1.0602 and 1.0559. However, it is worth noting that the RSI is now situated in the oversold boundaries.
In truth, whether the USDCAD can extend lower towards the latter support levels will likely be dependent upon the reaction to Canada’s GDP release on Monday afternoon. An impressive GDP figure will likely entice further optimism that the BoC will turn transition towards a more hawkish stance, and raise interest rates. This would most likely accelerate the USDCAD’s recent downward movement.
Whereas, if Monday’s Canadian GDP release results in a more muted Bank of Canada response, a correction could be forthcoming. It is also worth remembering that next Thursday, the latest US non-farm payroll (number of jobs the US created last month) will be announced.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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