USDCAD: Spoiled Dollar Bulls Not Impressed By Strong Retail Sales

Like the proverbial overweight only child getting a third piece of birthday cake, USD bulls are getting spoiled. Today’s release of the August Retail Sales report showed that the US economy continues to grow strongly. The headline reading came out in-line with (elevated) expectations at 0.6% m/m, but the Core reading, which filters out volatile automobile sales, was better than anticipated at 0.3% vs. 0.2% eyed. Perhaps most importantly, last month’s disappointing flat reading in retail sales was revised up to show 0.3% growth, indicating that there was no mid-summer hiccup for traders.

The market reaction to the report has been relatively limited as of writing, with the US dollar actually inching lower against some of its major rivals. EURUSD has ticked up a few pips since the release of the report, while USDJPY has shed about 20 pips to trade back near 107.10. At this point, buck bulls are using the strong report as an excuse to take profits ahead of the weekend and next week’s data-packed economic calendar… or perhaps USD bulls have simply become a bit too spoiled and need to go on a diet to truly appreciate how spoiled they’ve been of late.

Technical View: USDCAD

Notwithstanding the initial reaction, today’s retail sales report should pose no threat to the medium-term uptrend in the US Dollar, and especially, USDCAD. Over the last four months, USDCAD has carved out a clear inverted Head-and-Shoulders pattern. For the uninitiated, this classic price action pattern shows a shift from a downtrend (lower lows and lower highs) to an uptrend (higher highs and higher lows) and is typically seen at major bottoms in the chart. Given major 38.2% Fibonacci retracement support at 1.0650, longer-term traders may start to turn their eyes skyward toward the 5-year highs above 1.1200 in the coming weeks.

More immediately, the break above the neckline and shorter-term 61.8% Fibonacci retracement resistance at 1.1025 suggests the pair may have more upside heading into next week. The secondary indicators concur, with the MACD trending higher above its signal line and the “0” level and the RSI holding in bullish territory, but not yet overbought.

Heading into next week, USDCAD bulls will look to target the 78.6% Fib retracement at 1.1135 next; if that barrier is eclipsed, a continuation toward the 5-year high at 1.1275 may be in play by the end of the month, especially if the Fed turns hawkish next week. On the other hand, a drop back below the key 1.1000 area would raise some warning flags for bulls, and a drop below the 50-day MA would turn the bias outright bearish, though we view that as a lower probability scenario at this point.