Trade Of The Week: USDCAD Knocks On Major Support

• CAD weakens against most G10 currencies month-to-date.
• Big week for the USDCAD thanks to BoC rate decision and US inflation data.
• Trader’s pricing in a 67% probability of a BoC hike on Wednesday.
• US Inflation data could influence USDCAD this week.
• USDCAD trapped within wide range but breakout could be pending.

The Canadian Dollar has weakened against most G10 currencies month-to-date despite ending June as one of the top performers versus the US Dollar.

Despite the choppy price action, the USDCAD could see heightened volatility this week as investors evaluate last Friday’s mixed US jobs report along with Canada’s strong jobs data. On top of this, the Bank of Canada’s rate decision and highly anticipated US inflation data on Wednesday could place the currency pair on a rollercoaster ride.

Taking a quick peek at the technical outlook, prices are back within a range on the weekly timeframe following the breach below 1.3250 back in early June.

The USDCAD could be gearing up for a significant move and here are 3 reasons why:

1. Bank of Canada rate decision

On Wednesday, July 12th – the Bank of Canada (BoC) will announce its rate decision.

Last Friday’s robust jobs data from Canada boosted speculation around the BoC hiking interest rates in July. The country added 60,000 jobs in June which smashed expectations, but the unemployment rate rose to 5.4% – the highest since February 2022. Traders are currently pricing in a 67% probability of a 25-basis point hike on Wednesday with this fully priced in by September’s meeting.

• Should the BoC move ahead with a rate hike in June or signal a rate hike in September, this could be the catalyst to trigger another major breakdown below 1.3250 on the USDCAD.
• An unexpected scenario where the central bank adopts a dovish stance towards rates could weaken the CAD, triggering a rebound on the USDCAD.

2. US June Consumer Price Index (CPI)

On Wednesday, July 12th – the latest US inflation report will be published.

All eyes will be on the incoming US inflation data which could influence Fed hike expectations. Headline inflation is expected to slow 3.1% in June 2023 vs June 2022, a noticeable decline from May’s 4% year-on-year. However, Core CPI year-on-year which strips out volatile energy and food prices is expected to cool 5% from the 5.3% seen in May which remains above the Fed’s 2% target.

• Ultimately, signs of still stubborn inflation may boost the dollar as expectations mount around the Fed keeping interest rates higher for longer. A strong dollar may push the USDCAD back towards 1.3600 and higher.
• Should June’s CPI report show signs of cooling inflation across the board, this could fuel hopes around the Fed pausing rate hikes beyond July’s policy meeting. If the dollar weakens on this prospect, the USDCAD may sink lower.

3. Technical forces: Breakdown?

It has been the same old story for the USDCAD on the monthly timeframe.

Prices remain trapped within multiple layers of support and resistance. Major monthly support can be found at 1.3250 and monthly resistance at 1.3850. A breakout/down beyond these levels may open a path higher towards 1.4100 or lower towards 1.2970.

Focusing on the daily timeframe, prices are bouncing within a narrower range with resistance at 1.3650 and support at 1.3270. Despite the recent rebound, bears still seem to be in some position of power with prices trading below the 50, 100, and 200-day SMA. A selloff below 1.3270 could open the doors towards 1.3130 and 1.2970, respectively. Should prices push back above the 200-day SMA, bulls could challenge 1.3650 and 1.3850, respectively.