USD/CAD Rate Vulnerable to Sticky Canada CPI

Canadian Dollar Talking Points

USD/CAD fails to retain the advance from the start of the week as it registers a fresh monthly low (1.3226), and fresh data prints coming out of Canada may lead to a further decline in the exchange rate as the Consumer Price Index (CPI) is anticipated to show sticky inflation.

USD/CAD Rate Vulnerable to Sticky Canada CPI

USD/CAD remains under pressure following the larger-than-expected slowdown in the US Consumer Price Index (CPI) as signs of easing inflation fuels speculation for a shift in the Federal Reserve’s hiking-cycle, and the exchange rate may continue to trade to fresh monthly lows as it no longer responding to the positive slope in the 50-Day SMA (1.3532).

As a result, USD/CAD may struggle to retain the advance from the September low (1.2954) amid growing speculation for a smaller Fed rate hike in December, and the update to Canada’s CPI may fuel the recent decline in the exchange rate as the headline reading for inflation is expected to hold steady in October.

Canada’s CPI may influence USD/CAD as the gauge is projected to print at 6.9% per annum for the second month, and the Bank of Canada (BoC) may come under pressure to carry its hiking cycle into 2023 as the central bank acknowledges that “the demand for goods and services is still running ahead of the economy’s ability to supply them, putting upward pressure on domestic inflation.”

In turn, the BoC may continue to strike a hawkish forward guidance at its next meeting on December 7 as “the Governing Council expects that the policy interest rate will need to rise further,” but the Canadian Dollar may face a similar fate to its US counterpart should the update to Canada’s CPI reveal slowing inflation.

An unexpected slowdown in Canada inflation may foster a near-term advance in USD/CAD as it seems to be responding to the former-resistance zone around the July high (1.3224), but a further decline in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment (IGCS) report shows 55.56% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 1.25 to 1.

The number of traders net-long is 15.91% lower than yesterday and 13.75% lower from last week, while the number of traders net-short is 1.99% lower than yesterday and 31.64% lower from last week. The fall in net-long position comes as USD/CAD registers a fresh monthly low (1.3226), while the decline in net-short interest has fueled the recent shift in retail sentiment as 44.61% of traders were net-long the pair last week.

With that said, USD/CAD may struggle to retain the advance from the September low (1.2954) if Canada’s CPI raises the BoC’s scope to pursue a restrictive policy, but lack of momentum to push below the July high (1.3224) may lead to a near-term advance in the exchange rate as the former-resistance zone acts as support.

USD/CAD Rate Daily Chart

Source: Trading View

• USD/CAD continues to trade to fresh monthly lows as it no longer responds to the positive slope in the 50-Day SMA (1.3532), with a break/close below the 1.3200 (38.2% expansion) to 1.3220 (100% expansion) region opening up the Fibonacci overlap around 1.2980 (61.8% retracement) to 1.3040 (50% expansion).
• Failure to defend the September low (1.2954) may push USD/CAD towards the overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion), but ;ack of momentum to trade below the July high (1.3224) may curb the recent decline in the exchange rate as the former-resistance zone acts as support.
• A move back above the 1.3290 (61.8% expansion) to 1.3310 (50% retracement) region brings the 1.3400 (61.8% retracement) handle back on the radar, with the next area of interest coming in around 1.3460 (61.8% retracement).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong