Canadian Dollar corrects back after the release of strong US Consumer Sentiment data

• US Dollar makes up ground against the Canadian Dollar after Michigan Consumer Sentiment data beats expectations. 

• Canadian Dollar had rallied to new 2023 highs against the US Dollar after the BoC’s decision to raise rates at its meeting on Wednesday. 

• Softer US inflation data out on Thursday was a drag on the US Dollar, further boosting CAD.

• USD/CAD has fallen to a tough confluence of support at around 1.3100 and bounced on Friday. 

Canadian Dollar (CAD) pulls back versus the US Dollar (USD) on Friday, after the Michigan Consumer Sentiment Index for June beats expectations, improving the outlook for the US economy and supporting the Buck. The CAD had risen to new 2023 highs earlier in the day on a combination of softer US inflation and the Bank of Canada’s (BoC) decision to raise interest rates by 0.25%.

USD/CAD is trading in the1.31s during the US session on Friday.  

Canadian Dollar news and market movers 

• The Canadian Dollar loses ground versus the US Dollar resulting in a rebound in the USD/CAD exchange rate after it reached a new low for the year. The turnaround came after the release of better-than-expected Michigan Consumer Sentiment Index data for June, which imporved the outlook for the US economy, supporting USD. 

• The Canadian Dollar had traded to new year-to-date highs against the US Dollar after the US Bureau of Labor Statistics released PPI data for June on Thursday, and the results came out lower than expected. The softer inflation data supports the narrative initiated by Wednesday's Consumer Price Index data miss. 

• The PPI data backs up the market's view that the Federal Reserve may only raise rates one more time in 2023, according to the CME FedWatch Tool, which calculates probabilities of future rate decisions based on the price of Fed Funds Futures. Since higher rates are bullish for currencies because they attract more foreign capital inflows, the suggestion the Fed may be 'one and done' weighed on the USD (negative for USD/CAD).

• US PPI dropped to 0.1% from 0.9% YoY, falling way below estimates of 0.4%. On a monthly basis they rose by 0.1% which though higher than May's -0.4% was nevertheless below analysts' estimates of 0.2%. 

• Core PPI (excluding Food & Energy) slowed to 2.4% from 2.8% at the same time in 2022, and below estimates of 2.6%. MoM Core PPI showed a 0.1% rise, which was below the 0.2% estimate and the same as the 0.1% of the prior month of May. 

• The Canadian Dollar also traded higher after the BoC raised interest rates by 0.25%, bringing the overnight rate to 5.00% at its meeting on Wednesday. Higher rates were positive for CAD (negative for USD/CAD).

• Governor Tiff Macklem stressed future policy decisions would be dependent on incoming data, leaving markets unclear on whether this would be the BoC’s last hike in the tightening cycle. 

• The decision to raise rates at the July meeting had only been reached after a discussion by board members on the relative merits of leaving rates unchanged or raising them. 

• “On balance, our assessment was the cost of delaying action was larger,” Macklem concluded.

• Regarding inflation, the BoC Governor said that whilst it was welcome inflation in Canada had fallen to 3.4% in May – substantially below the 8.1% of last summer – a large number of items in the basket of goods used to calculate the Consumer Price Index (CPI) were still rising strongly. 

• “A little over half the components of the CPI basket,” had seen their prices rising more than 5%, said Macklem in the press conference after the announcement. “If you look across the basket, meat is up 6%, bread is up 13%, coffee is up 8%, baby food is up 9% … rent is up 6%,” he added. 

• Demand and consumption in the Canadian economy were still growing, said Macklem, indicating the possibility of inflation pressures ahead. 

• The sensitive housing market had also defied expectations of a slow-down and was instead showing signs of picking up despite higher interest rates increasing mortgage repayments. 

• Recent labor market stats showed 60K new jobs were filled in Canada in June, more than three times the estimated 20K. Average Hourly wages rose 3.9%, which though lower than the previous month’s 5.1%, was nevertheless buoyant. Despite the strong jobs number, the report also showed the Unemployment Rate unexpectedly rising to 5.4% from 5.2% in the previous month, and higher than the 5.3% forecast. 

• All in all, the overall positive macroeconomic data from the Canadian economy leant the BoC governing council to make their decision to raise rates to stave off incoming inflationary effects rather than wait and see.

• The BoC does not now see inflation returning to its 2% target until the middle of 2025, about 6 months later than its previous forecast. 

• Although the Canadian Dollar rose on the BoC announcement, a growing number of analysts foresee a harsher climate for the currency in the second half of 2023.

• Analysts at National Bank of Canada, Macquarie and Nomura Bank all foresee the CAD weakening in H2 of 2023. 

• “Our bearish view for the second half 2023 remains predicated on the prospect that Canada will suffer a more severe slowdown than the U.S.,” said Thierry Wizman, global currencies and interest rate strategist at Macquarie Futures USA.

• Wizman cites the negative impact higher interest rates will have on the Montreal Housing market as a major driver of a weaker CAD later in the year. 

• “The rise in rates has already happened and households will begin to feel the squeeze as fixed-rate mortgages are rolled over at higher rates,” Wizman said, in a note quoted by the Financial Post. 

• Nomura sees rate differentials and greater growth in the US as driving USD/CAD higher, to a possible target above 1.3700. 

• The negative effect of a global economic slowdown on commodity prices negatively impacting Canada's terms of trade is the main factor dragging CAD down, according to National Bank of Canada in a note cited on Poundsterlinglive.com. 

• The US Federal Reserve is almost certain to raise rates at its July 26 meeting, given the 5.3% Core CPI still prevalent in the US, which will probably boost the US Dollar.

• Despite Wednesday’s lower-than-expected US inflation data, market gauges of the probability of a further rate hike from the Fed at their July 26 meeting put the chances at above 90%, although any further hikes in 2023 are now less probable than the Fed standing pat.  

Canadian Dollar Technical Analysis: Major support floor touched

Despite recent weakness, USD/CAD remains in a long-term uptrend on the weekly chart. Price is still above the major trendline drawn from the 2021 lows and a new sequence of descending peaks and troughs has not yet taken root. Given the old saying that ‘the trend is your friend’, the probabilities of an eventual continuation higher marginally favor longs over shorts.

Since October 2022, the exchange rate has been in a broadly sideways consolidation within the uptrend. Within that consolidation USD/CAD appears to have completed a large measured move price pattern that began forming at the March 2023 highs. This pattern resembles a 3-wave ABC correction, in which the first and third waves are of a similar length (labeled waves A and C on the chart below). 

USD/CAD’s measured move looks lto have either completed or be in the process of completing, given waves A and C are of a similar length. 

US Dollar vs Canadian Dollar: Weekly Chart

A confluence of support situated under the June lows between 1.3070-1.3100, which is made up of several longer moving averages and a major trendline, provides a backstop to further losses. Only a decisive break below 1.3050 would indicate this thick band of weighty support has been definitively broken. This would also bring the longer-term uptrend into doubt. 

US Dollar vs Canadian Dollar: Daily Chart

The daily chart shows USD/CAD has declined all through this week and has now breached the June 27 (and year-to-date) lows at 1.3117. The price is unlikely to go much lower, however, as immediately below the June lows is the confluence of support mentioned above. Furthermore the price and RSI are showing a bullish convergence, with price making a lower low but RSI remaining higher than the June 27 low. This non-conformity means the move down sufferes from an underlying weakness and suggests the chance of a recovery. Only a clean break below 1.3050 would reverse the trend and suggest an overall more bearish picture for USD/CAD.  

On the other hand bulls have their work cut out for them and it will take a decisive break above the 50-day SMA at 1.3400 to reinvigorate the USD/CAD uptrend again. Bulls still marginally have the upper hand despite the bearish climate, with the odds slightly favoring an eventual recovery and a continuation higher. Key levels, however, are being threatened.