USDCAD analysis: Will bears step up?

USD/CAD fundamental analysis

A tight labour market with unemployment at historic lows that continues to boost consumption, support from interest rates (with a very hawkish Bank of Canada), and, finally, the persistently high energy prices of oil and gas, which act as a tailwind for the Canadian economy, all contribute to the Canadian dollar’s solid fundamentals.

The Bank of Canada surprised markets by raising its benchmark rate by a full percentage point in July (), signaling further tightening to control inflation. As a result, the Fed-BoC monetary policy divergences have narrowed significantly, as evidenced by the short-term (2-year) rate differential between US and Canadian Treasuries, which is now very close to parity (only 9 basis points). A more hawkish Fed is clearly a risk factor, but the Canadian dollar appears to be better protected now thanks to an equally hawkish BoC.

Annual inflation in Canada () reached a new 39-year high in June (8.1 percent year on year), but fell short of market expectations (8.4 percent), while producer inflation () fell for the third month in a row.

In contrast to the United States, which unexpectedly entered a technical recession in the second quarter of the year, the Canadian economy grew by 1.1% in Q2, according to preliminary estimates, with broad-based expansion in 14 of 20 economic sectors.
Regarding the growth outlook, the global and US economic slowdown is starting to weigh on the Canadian economy. In July, the S&P Global Canada Manufacturing PMI fell to 52.5 from 54.6, marking the sector’s slowest growth since June 2020.

The Canadian dollar has historically weakened in times of global economic slowdown, but this time appears to be holding up well also thanks to the support of WTI ()and sticky-high prices.

OPEC+ has announced one of the smallest production increases (100,000 b/d since September) in its history, which is equal to 1/1000 of the world’s demand. This means that the crude oil market will continue to be very tight in the coming months and that oil price will remain well sustained, despite the demand of large oil consumers is expected to slowdown. This may continue to represent a tailwind for the Loonie's strength.

USD/CAD technical analysis

Technically, ) has been trading in a tight, choppy range between 1.278 and 1.294 for the past three weeks.
Despite the fact that the ascending channel has been in place for more than a year now, indicating that the major trend still remains bullish, the short-term momentum is gradually shifting in favour of the Canadian dollar.

The RSI has been below 50 since July 18, while the MACD fell below the zero line.

In the short term, the 1.278 support level (61.8 percent Fibonacci retracement of the rally in June/July) represents an important test. If USD/CAD breaks down here and then at the 200-day moving average at 1,273, it could fall to 1.266 (78.6 percent Fibonacci retracement).

Alternately, 1.295 (50 percent Fibonacci retracement) could act as a potential resistance test. A breakout to the upside would pave the way for a spike to 1.305 (23.6% Fibonacci retracement) and then 1.322 yearly highs. However, in order to regain 1.32 levels, a combination of Fed hawkish and BoC dovish shifts as well as indications of a significant slowdown in oil demand will be required.

Analysis written by Piero Cingari, forex and commodity analyst at Capital.com

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