Market Analysis

USDCAD: On the defensive ahead of US retail sales

The US consumer price index (CPI) rose to 2.5% year-on-year in October, compared to the 2.3% registered in the previous month and in line with analysts’ estimates of 2.5%.  The CPI figure increased on the back of rising prices of fuel oil and gasoline. On a monthly basis, consumer prices expanded 0.3%, comparing to 0.1% registered in September and consistent with analysts’ consensus. It is the highest monthly gain in nine months, mainly driven by gasoline. The CPI is a key indicator to measure inflation and changes in purchasing trends and a high reading is seen as positive for the USD, while a low reading is seen as negative.

The price of oil, one of Canada’s major exports, recovered some of the previous session’s slide on the growing prospect of Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers cutting the output in 1 million barrels per day (Bpd) at the next meeting in December 2018. When the price of oil rises, Canadian oil companies receive more US dollars, so they need to exchange US dollars for Canadian ones on foreign exchange markets creating more supply of US dollars and generating more demand for Canadian dollars.

The Bank of Canada (BoC) raised the interest rate by 25 basis points (bps) to 1.75% on October 24th from 1.50%, as widely expected by market analysts. It marks the third increase this year and the highest rate since December 2008. Policymakers said that more hikes would be needed to keep inflation close to the target of 2%, as the economy stays strong and the new US-Mexico-Canada Agreement (USMCA) would reduce economic uncertainty. The bank also mentioned evidence that Canadian households are adjusting well to higher borrowing costs. The rise of the interest rates or a hawkish view about the inflationary outlook of the economy it is seen as positive for the CAD. On the other hand, a dovish view on the Canadian economy and maintaining interest rate unchanged, or cuts the interest rate it is seen as negative.

Since the beginning of the year 2018 until last Friday close, the USDCAD remains positive with a gain of over 5.5% and after the beginning of November, it managed to advance more than 0.5%. Nonetheless, since the beginning of the week has a slight gain of almost 0.3% although, on the daily time-frame, the currency pair closed in the green with a minor gain of 0.07%. Furthermore, the USDCAD remains in a bullish phase since mid-October.

On yesterday session, the USDCAD went back and forth without any clear direction consequently closed in the middle of the daily range, in addition, managed to close within Tuesday range, which suggests being clearly neutral, neither side is showing control.

The stochastic is showing an extremely overbought market and is displaying a lack of momentum.

The currency pair started October with a gap down but was quickly filled and the price rallied until the end of the month creating an upward trend line that can be understood as a strong support. November began with a slight downward correction that turns into a sideways correction near the upward trend line where it found enough support to push upward and break a daily resistance that now turned into a daily support. The USDCAD seems to be consolidating above a daily support and aiming for the 61.8 Fibonacci expansion at 1.3290.


USD/CAD Daily Candlestick Chart

USD/CAD Daily Candlestick Chart 


Watch out this Week:

On Thursday, November 15 at 13:30 GMT (08:30 AM ET), the US Census Bureau is scheduled to release the US retail sales month-on-month in October, which is expected to expand 0.5%. Changes in retail sales are widely followed as an indicator of consumer spending, usually, a high reading is seen as positive for the USD, while a low reading is seen as negative. Later in the day at 16:30 GMT (11:30 AM ET) the Federal Reserve (Fed) Chairman Jerome Powell is scheduled to speak about the outlook for the US economy and monetary policy. Traders and investors closely watch his speeches as they are often used to drop hints regarding future monetary policy.

On the release front, there are no Canadian events for a third straight day.


Written by Hugo O’Neill, External Analyst


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