Under-the-Radar Canadian Data has Big Implications for USDCAD

Traders are (rightly) obsessed with the outcome of Scotland’s Independence vote today, but we’ve discussed the issue ad infinitum over the past week (see here, here, here, and here for a few examples) so rather than beating a dead horse, we’ll check in with USDCAD. While it’s been lost in the cacophony of data in other G10 countries, Canada will also be releasing a couple of market-moving reports tomorrow.

At 8:30am ET (12:30 GMT) tomorrow, Canada will release the latest readings on CPI and Wholesale Sales. The Consumer Price Index is expected to have contracted by 0.1% m/m after last month’s 0.2% contraction. The Core CPI measure, which filters out the prices of more volatile items, is expected to edge up 0.2%, more than unwinding last month’s 0.1% contraction. A weak inflation reading could prompt traders to push back their forecasts for interest rate hikes from the Bank of Canada from the current July 2015 expectation. At the same time, the July’s Wholesale Sales could give a preliminary read on retailers’ expected consumer spending; the measure is expected to show 0.8% growth after rising 0.6% in June.

Technical View: USDCAD

Turning our attention to the 4hr chart reveals a clear technical pattern. After the recent rally stalled out at 1.1100 on this week’s open, rates have dropped back to previous support near 1.0930. The price action over the last two weeks has created a clear Head-and-Shoulders pattern with the neckline at the aforementioned 1.0930 level. For the uninitiated, this pattern shows a shift from an uptrend (higher highs and higher lows) to a downtrend (lower highs and lower lows) and is typically seen at meaningful tops in the market.

The secondary indicators bolster the bears’ case. The RSI formed a clear bearish divergence at the recent highs, showing less buying pressure on the rally to 1.11. Meanwhile, the MACD is trending lower below both its signal line and the “0” level, showing clearly bearish momentum on this timeframe.

If tomorrow’s Canadian data comes out better-than-anticipated, USDCAD could easily break below critical neckline support at 1.0930. In that case, a drop to at least previous support at 1.0825 is likely, and the H&S measured move target comes in down all the way down near 1.0765. Of course, weaker data out of Canada could prompt USDCAD to bounce back; the pair’s near-term bias is neutral between 1.0930 and 1.11, and a rally above 1.11 would favor the bulls.

Source: FOREX.com