Long weakening, minimal risk to short
Abstract.
On Thursday, the USDCAD struggled to capitalize on its recent strong rally from the 1.3300 handle to continue its advance and moved slightly lower before the closing bell. However, the pair managed to hold above the 1.3600 handle early in the European session (Friday) and is now slightly above the near one-month high reached on Wednesday.
Fundamentals
On Thursday, a recovery in crude oil prices supported the commodity-linked Canadian dollar amid a weaker U.S. dollar and weighed against the greenback against the Canadian dollar. Meanwhile, the rise in oil prices may be attributed to some technical buying after the recent plunge to new monthly lows, due to recession fears and increased Russian crude exports offsetting the impact of OPEC+ production cuts.
This comes on the heels of very disappointing GDP data from the U.S. and Germany, while inflation indicators in the U.S. remain well above expectations and the just-released PCE price index, the Fed's favorite inflation indicator, could drive today's market action.
Core PCE rose 4.6% year-over-year, in line with expectations, but February's figure was revised to 4.7% year-over-year. Overall PCE rose 4.2% year-over-year, albeit down sharply from the previous value of 5% and still well below expectations.
However, cyclical core inflation continues to move higher while non-cyclical core inflation declines, which is a much bigger problem for the Fed.
The cyclical core PCE indicator, which tracks inflationary pressures associated with the current economic cycle, is now at its highest level since 1985. U.S. personal income rose 0.3% YoY, slightly above expectations of 0.2%, while spending remained unchanged, better than expectations of -0.1%.
On the annual rate, spending growth slowed to 6.0% (in line with income growth), but this is still the lowest level since February 2021. And on an inflation-adjusted basis, real spending was flat on a year-over-year basis. As a result, the savings rate rose from 4.8% to 5.1% in March, the highest level since January 2022.
Overall, these inflation numbers were not enough to provide any support for the Fed. On the other hand, speculation about an imminent Fed rate cut later this year continues to weigh on the dollar. Fresh concerns about contagion risks in the U.S. banking sector, the debt ceiling impasse and slowing economic growth have fueled such expectations.
The USD/CAD is heading towards key resistance at 1.3630 in the New York session. The Canadian dollar asset moved higher as the greenback was looking to end its nominal correction, following a contraction in volatility. The dollar index fell slightly to around 101.80 after being influenced by the continued gains in US stocks just after the opening bell.
Technicals
In last month's forecast, we highlighted the importance of support at the yearly low close at 1.3400, while noting that a break below these levels would threaten to test the 38.2% retracement of the 1.3225 level. A break below the yearly low closed near 1.3309 two weeks later. The subsequent rally extended from the lows to the current level of 1.36700. Note that the 52-week moving average is now converging at this level and further underlines the technical significance of the indicator.
The currency pair's rally this week is testing the 61.8% Fibonacci retracement of the March decline at 1.3648. Continued upside from here would expose key resistance around the annual high of 1.3805. If its price reaches above this level, it will generate a bigger reaction to drive a run towards the 2022 weekly close at 1.3881 and the extension of the March 2020 reversal close at the 1.618% level (1.3990).
The USDCAD is continuing to consolidate within a sharp multi-month contraction range below slope resistance for now, with the recent recovery testing near-term resistance. From a trading perspective, this is a very good range to reduce long positions to raise protective stops, and if prices move higher and eventually need to close above 1.3805 to mark a broader recovery in 2021, late declines should be limited to a retracement of the 1.3400 level.
However, we do not see the pair continuing to test above the 1.3805 level. Since the long pull-up from the bottom at 1.3309 is already extremely exhausted, the bulls may take profits after knocking out the previous stop-loss order at 1.3700. Therefore, the least risky resistance is to the downside. Operationally, the stop-loss order will be used as a benchmark to go short on the high side.
Trading recommendations
Trading direction: short
Entry point: 1.3700
Target point: 1.3489
Stop-loss point: 1.3770
Valid until: 2022-05-12 23:55:00
Support points: 1.3589, 1.3524, 1.3443
Resistance points: 1.3697, 1.3743, 1.3800
USDCAD 
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