Will the central bank pas de deux continue?

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  • USD/CAD hits 20-month high despite BoC rate hike of 100 basis points.
  • Ongoing safe-buying in the US dollar and prospects for Fed interest rates are supportive of the greenback.
  • WTI sinks below $100 dragging the lunatic lower.
  • FXStreet Forecast Poll points to lower USDCAD.

The Bank of Canada’s surprise 1.0% hike on Wednesday, the first since 1998, ended only as a temporary setback from the US dollar’s inexorable rise.

US inflation climbed to 9.1% annually in June, the highest since November 1981, and along with markets seeking a safe haven ahead of the expected global recession, USD/CAD climbed to 1.3224 and peaked 20-month high that closed at 1.3119 on Thursday. Friday’s trading brought the pair back to the 1.3025 starting line for the series of stop-loss runs above 1.3050 that defined Thursday’s action.

West Texas Intermediate (WTI) shed 8.6% Monday-Thursday to $93.65 and significantly depreciated the Canadian dollar before recovering 0.9% to $94.51 on Friday. Oil is down 9.7% for the month and 20.7% since closing at $118.14 on June 8th.

Friday’s close at 1.3026 was just below the effective top of the 1.3045 range for the last three months itself, the pair’s high since November 2020.

US retail sales rose 1.0% in June, slightly faster than forecast, although the difference and more likely reflects price inflation rather than higher spending. The apparent lack of a negative impact from inflation on consumer spending eased fears of an imminent recession and dragged Treasury yields and the dollar lower on Friday, encouraging a strong rally in US stocks. Treasury odds for a 100 basis point hike on July 27th fell back to 30% from over 70% previously. Comments from several Fed Chairmen showed both aggression and restraint at the meeting in two weeks.

One aspect of the upcoming Fed decision that isn’t getting much attention is the second quarter GDP report, which is due the next day. Governors may want to secure as large a rate hike as possible before slowing economic growth rules out further action. Activity in the second quarter is estimated at -1.5% by the Atlanta Fed’s GDPNow model and after the 1.6% drop in the first three months, the US could be in a traditional recession on July 28th.

In addition to US CPI and Retail Sales releases, producer prices rose 11.3% in June versus 10.9% in May, with core prices slipping slightly to 8.2% from 8.5%. Industrial production and capacity utilization were weaker than expected in May, although Michigan consumer sentiment rose to 51.1 for July, not falling as forecast.

Canadian data was limited as May manufacturing and wholesale sales came in weaker than expected.

USD/CAD outlook

The near future for the USDCAD hinges on market perception for a 100 basis point hike at the Federal Open Market Committee meeting in two weeks. US data next week will provide few direct clues, although Wednesday’s existing home sales are likely to record the impact of higher mortgage rates. Home buying is already 1.16% below January’s annualized pace of 6.49.

If the Fed opts for the more dovish 75 basis point hike, Canadian and US interest rates will be at 2.5%. Canadian inflation is expected to rise to 8.8% in June when it is reported on Wednesday. They could give the madman an advantage should things get hot.

USD/CAD consolidation outlook lowers. Technically, 1.2980 – 1.3020 area should provide significant support.

Thursday’s high is more than double digits away and the stop buy orders above 1.3000 that propelled the market higher have been filled and are unlikely to be replaced. With little new information scheduled and WTI returning to pre-Ukraine levels, USDCAD will inevitably seek fresh stimulus from the Fed.

Canada Statistics July 11-15

FX Street

US Stats 11th-15th July

FX Street

Canada Statistics July 18-22

FX Street

US Statistics 18th-22nd July

FX Street

USDCAD technical outlook

The MACD (Moving Average Convergence Divergence) and Relative Strength Index (RSI) continued to move into bullish territory this week. Since the last week of June, the MACD price line has been encircling the signal line without any decisive movement. Thursday’s rise opened a positive divergence. The Average True Range (ATR) posted a sharp rise with Thursday’s stop-loss run, which is likely to level off if the USD/CAD pair slides into the technically congested 1.3000 area.

21-day moving average (MA) at 1.2962 and 100-day ma at 1.2865 suggest likely stability for USDCAD around 1.2900.

Resistance: 1.3050, 1.3075, 1.3120, 1.3135

Support: 1.3000, 1.2965, 1.2945, 1.2930, 1.2900

Moving averages: 21 days 1.2962, 50 days 1.2865, 100 days 1.2765, 200 days 1.2699

FXStreet Forecast Poll

FXStreet Forecast Poll represents expected technical consolidation as rate drivers await July 27th Fed decision.

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