The Canadian Dollar is trading at approximately 1.4025 to the USD. This push follows the release of the Canadian Consumer Price Index (CPI) inflation report, which has sent the market into turmoil. This was up from inflation of just 0.4% YoY in September of last year, the report revealed. This increase, in particular, is now fueling speculation about future interest rate moves by the Bank of Canada. USD/CAD has been moving higher since the beginning of September. Analysts are cautiously watching what appears to be important short term technical levels as well as potential resistance candles.
Against the backdrop of surging inflation, traders are trying to read the tea leaves as to what this means for monetary policy. With the Canadian Dollar heavily influenced by interest rates set by the Bank of Canada, expectations are shifting towards the likelihood of another interest rate cut. The fate of Canada’s economy is an important driver of the currency’s direction. Further, inflation rates and the trade balance are equally important variables to weigh.
Technical Analysis of USD/CAD
Since the first week of September, the USD/CAD currency pair has been on a bullish tear. It is now getting close to breaching the 1.4025 ceiling. Another key technical barometer is the 50-day Exponential Moving Average (EMA), which as of this writing is located just under 1.3900. And now, the moving average has just begun to cross above the 200-day EMA, which is at 1.3885. This development forms what is known as a “golden cross.” This setup is widely considered a bullish reversal pattern by traders.
Yet notwithstanding all this positive price action, USD/CAD is still struggling to break out above a key technical ceiling at 1.4050. Those sellers have returned in the 1.4070–1.4100 area, which helped cap advances on the last three trading days of last week. Should the currency pair drop below this resistance level, it could trigger a deeper retracement toward the psychological support level of 1.3800.
The birth of a golden cross can be seen as a symbol of possible bullish sentiments heading into the market. Market participants are warned that resistance in the 1.4070–1.4100 area may prevent additional advances in the near term.
Impact of Economic Indicators
Here’s why the recent CPI report from Canada showing a CPI inflation rate of 2.4% year-on-year matters so much for the Loonie. With inflation increasing, pressure is mounting for the Bank of Canada to change their course on monetary policy. No doubt market participants are looking closely at these developments. In response to these changes, analysts are already predicting that another interest rate cut is in the cards.
The Canadian Dollar’s fortunes are inextricably tied to what happens outside its borders. Specifically, the sharp rise in the price of oil—Canada’s largest export commodity—is a major contributing factor, in addition to domestic monetary policy. The ability of oil price movements to affect the Canadian economy and thus its currency value in turn is clear from this explanation.
Trade balance and overall economic wellbeing, for instance, can be equally or more important, analysts argue. These factors are very important in determining how the Canadian Dollar’s future path looks like. The dance between these forces makes for an exciting world for speculators to investors.
Upcoming US Economic Data
Adding to the volatility of USD/CAD is the upcoming release of US CPI inflation data due out on Thursday. This report will be a key litmus test for USD/CAD. What its creation would do, however, is greatly influence market perceptions of both currencies by making inflation in the two nations easily comparable.
As traders prepare for this big data drop, they continue to keep an eye on important technical levels set previously. How well USD/CAD reacts to U.S. fundamentals will be critical in determining the next course of trading.