Canadian dollar rallies as Oil recovers

The Canadian Dollar posted a strong straight week of gains as the USDCAD fell-1.56% for the week and in total -2.95% off a near 11-year high at 1.3333. For the most part, the gains in the Loonie were largely on account of scaled back expectations from the US Federal Reserve which failed to hike rates in September this year. The dovish tone from the FOMC's meeting minutes reflected the divided views and cast doubts on whether consumer inflation in the US would be able to reach the Fed's 2% target rate. Janet Yellen, the Fed Chairwoman in her speeches after the September's meeting noted that the Federal Reserve needed to see inflation expectations rise in the near term and not so much as inflation itself. As of August 2015, the US Core inflation rate has been unchanged at 1.8% and remained at this level for the most of 2015, with the exceptions of a few dips to 1.7% in February and May this year.

While keeping rates unchanged in September, the FOMC communicated that the Fed could hike rates in any of the remaining three meetings in following months. However, with the US jobs posting a weak print last month, where the US economy added lesser than expected jobs and with August payrolls also revised lower, expectations for an October rate hike are diminishing, while at the same time the markets are starting to doubt if the Fed will be able to hike in November or December.

The Fed funds rate hike expectations, which has been one of the main reasons for the rally in the US Dollar has taken a hit as a result, which in turn has given the commodity currencies such as the Canadian Dollar, Australian and New Zealand Dollar’s a bit of a respite from the prolonged decline.

Canada – Economic Outlook

In regards to the Canadian economy, the Bank of Canada has so far delivered two rate cuts this year, bringing the benchmark interest rates to 0.5%. The BoC is due to meet on October 21st which is when the BoC could consider changing the interest rates. Canada’s inflation has been largely stable near 1.3% since July 2015 marking the higher end of the range after Canadian inflation briefly dipped to 0.8% in April. Anticipating further declines in Crude Oil prices, BoC kicked off the year with rate cuts, citing it as an ‘insurance’ against further declines in Crude Oil prices. This bet seemed to have paid off as Canada seems more immune to the declines in Crude oil and thus inflation. GDP has been one of the major concerns however, as the quarterly GDP has been contracting at a pace of -0.5% for the quarter. For nearly two straight quarters, the Canadian GDP has been in a contraction and a yet another similar reading in Q3 GDP could put the country in a technical recession. It will be interesting to see how the BoC will decide in its monetary policy meeting later this month.

USDCAD – Technical Outlook

Starting with the weekly chart, USDCAD started its descent after forming a strong bearish engulfing candlestick pattern on the week of 28th September. This bearish pattern was followed through by last week's continued decline as well, closing at an eight week low of 1.294. USDCAD also managed to break below the 1.30 psychological round number with relative ease. There is scope for a potential retest back to 1.30 in the near term. If resistance is established at 1.30, we could anticipate further declines in USDCAD. Prices have so far managed to close below the 13 week exponential moving average, while the 52 week EMA currently sits at a dynamic support of 1.24.


USDCAD Weekly Chart Technical Analysis (Source: Tradingview.com)

Also on the weekly chart, we notice the bullish flag continuation pattern off which, prices broke out during the week of 29th June. The breakout from the bullish flag pattern saw prices clearing the resistance highs at 1.2775. The lack of any retest to the breakout or even the resistance high at 1.2775 is indicative that the current pullback to the uptrend is a correction. As such, this aspect reveals the fact that USDCAD remains a buy into the dips.

Technical resistances that could turn to support and ones which are of interest include 1.2775, marking the resistance high of the bull flag pattern and 1.27 round number, which could see a confluence of the minor rising trend line and the round number support. To the downside, a risk of support failure at 1.27 could most likely see USDCAD break the minor trend line, which could see the lower support at 1.2432 being tested.

USDCAD - Conclusion: Considering the fundamental outlook and the technicals combined, we expect a temporary top to have formed in the USDCAD if 1.30 holds out as resistance on any retest. This will see prices most likely range between the levels of 1.30 and 1.27. The currency pair remains in an uptrend however with the current declines being merely a pullback to the uptrend, as long as prices remain above 1.27.