USD/CAD preserves CPI-led gains above 1.31 despite USD weakness

Canadian inflation data miss expectations by a wide margin.
Existing home sales in the U.S. continue to decline.
US Dollar Index erases gains into London fix.

Eren Sengezer FXStreet

The USD/CAD pair rallied to its highest level since September 11 at 1.3120 as the loonie suffered heavy losses after today's data showed a much softer-than-expected inflation growth in Canada. Following the initial reaction, the pair retreated slightly and was last seen trading at 1.3110, adding 0.2% on a daily basis.

According to Statistics Canada, inflation, measured by the CPI, declined 0.4% on a monthly basis in September and dragged the annual rate to 2.2% from 2.8% compared to analysts' expectation of 2.7%. Furthermore, the core-CPI published by the Bank of Canada fell to 1.5% on a yearly basis to fall short of analysts' estimate of 1.8%. A separate report revealed that retail sales dropped 0.1% in August to put extra weigh on the loonie's shoulders. Although today's data is unlikely to change the expectations of a BoC rate hike next week, the bank could adopt a dovish tone regarding more rate raises in 2019.

Canada: Annual inflation in September drops to 2.2% vs 2.7% expected.
Canada: Retail sales declined 0.1% to $50.8 billion in August.
Canada: Government posted a budgetary deficit of $19.0 bln in fiscal 2018.

"Even if the BoC goes for less explicit forward guidance, we don’t see them speeding up the pace of hikes. Household sensitivity to rising rates remains a key issue, and today’s inflation numbers allow the BoC to continue tightening at a manageable pace,” says Josh Nye, Senior Economist at RBC Capital Markets.

On the other hand, after advancing to a 10-day high above 96, the US Dollar Index lost its traction amid profit taking into London fix and was last seen down 0.3% on the day at 95.70 to cap the pair's gains. Today's data from the U.S. showed that existing home sales dropped 3.4% in September. Commenting on the data, "Rising home prices and mortgage rates can only be countered by higher salaries and the confidence that income gains are a permanent condition. Wages and income have yet to return to pre-crash levels, and that, as much as financing costs are inhibiting home sales," FXStreet Senior Analyst Joseph Trevisani said.

Technical outlook by FXStreet European Chief Analyst Mario Blascak

Technically, the USD/CAD is trading within the sideways trend since reaching the cyclical peak at around 1.3380 on June 27. The 1.2930 line representing the 38.2% Fibonacci retracement of the uptrend from 1.2270 to 1.3350 served as a solid support for USD/CAD. Only the break below that barrier would open further potential on the downside. Given the fundamental and interest rate outlook, the upward potential for USD/CAD seems more feasible. The currency pair needs to break above 1.3090 representing the confluence of the trendline resistance and 23.6% Fibonacci retracement of the above-mentioned move to break further higher. Momentum is in elevated by pointing downwards and both MACD and Slow Stochastic are pointing upwards on a daily chart.

Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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