USDCAD Maintains Desending Channel Ahead of the Canadian Inflation Report

Fundamental Outlook

Annualized consumer prices in Canada are expected to rise 1.9 percent in July from 1.0 percent in June, which is on target to match January’s high. Inflation is likely to push higher on the back of the recent introduction of the Harmonized Sales Tax (HST), while higher prices for goods and energy costs will add onto the upward pressure on consumer prices. Despite the expected increase in prices, inflation will likely stay below the central bank’s 2 percent target. Indeed, the Canadian economy has recently became a standout amongst developed countries as lingering concerns about budget deficits in the Euro-zone continue to weigh on the euro, while the 3-month Euribor rate remains at elevated levels despite the passage of the ECB stress tests results. At the same time, the USDCAD has been very volatile recently as the world’s largest economy faces a weak labor market, tight credit conditions, and an uncertain growth outlook. This does not bode well for Canada as the U.S. is its main trading partner. A reading higher than expectations will stir specualtion of another rate increase by the BoC, and thus, cause the Canadian dollar to stregthen against the greenback.

Technical Outlook

USD/CAD

Source: Intellicharts – Prepared by Michael Wright

USDCAD:Price action has worked its way into the descending channel which has remained intact since July. Going forward, a clear break above this channel will validate a long position towards 1.0650. It is worth noting that our speculative sentiment index stands at 1.34, and signals for additional losses. Therefore, I do not rule out price action testing the upper bounds of the range and retreating shortly after.

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Written by Michael Wright, Currency Analyst

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Michael Wright is the author of FX Headlines, Fundamentals vs. Technical's, Weekly Spotlight, and Forex Trading Weekly Forecast