Inflation Surge Tanks USD CAD; Conditions Ripe for Short-Covering Rally – USD CAD... |
The USD CAD fell by more than a penny on Wednesday fueled by a higher than expected consumer price report. News that domestic inflation soared further than economists forecast led to speculation that the Bank of Canada would raise interest rates sooner than expected.
On Wednesday it was reported that consumer prices rose by 0.7% for the month of May, twice as much as expected. Gasoline prices led the surge, soaring a staggering 29.5% in the month. This was followed by a 4.2% increase in food prices. The surprise news led traders to increase their bets that the BoC would have to hike its benchmark interest rate before the fall as the market has been anticipating.
The Canadian Dollar received its initial boost this morning after Greek politicians approved a 5-year austerity plan designed to prevent the country from going bankrupt. The favorable outcome allowed Greece to become eligible for part of a European Union and International Monetary Fund bailout package. The news was positive for the Euro and bad for the U.S. Dollar.
Traders who had been buying the Greenback as a safe haven investment quickly shed the U.S. Dollar, giving gold and crude oil boosts as well as driving commodity-linked currencies higher. With a solid support base forming in the Canadian Dollar since Monday, the market seemed to be set-up for further upside action.
On Monday, the USD CAD posted a daily closing price reversal top shortly ahead of parity at .9912. The subsequent follow-through to the downside suggested that a top may be forming; however, there was no indication that a change in trend was taking place as traders remained cautious because of the Greek austerity vote.
Following the Canadian inflation announcement, the USD CAD fell sharply as Canadian Bond yields rose almost 10 basis points almost immediately following the release of the report. Traders quickly assumed this meant the market was pricing in an almost imminent interest rate hike.
Earlier in the month Bank of Canada Governor Carney told the senate banking committee that he felt consumer prices would rise in the short-run but that prices would eventually settle back to the target by the middle of the year. The BoC’s target rate is 2.0%, today’s report boosted inflation to 3.7%.
With inflation at its highest level since 2003, the consensus is the central bank may raise its benchmark interest rate at its next meeting on July 19, three months ahead of the market’s earlier prediction of October. Skeptics hesitate to jump on the interest rate hike bandwagon too soon however, ahead of Thursday’s Canadian GDP report. Forecasts are for a contraction of 0.1%. A weak growth figure should take the steam out of the inflation number, thereby underpinning the USD CAD.
Technically, the USD CAD is trading in a major range bounded by .9444 and .9912. This makes the retracement zone at .9678 to .9623 a major downside target. A test of this zone coupled with a weak GDP report could attract profit-taking, triggering a short-covering rally.
In addition to the 50% level at .9678, uptrending Gann angle support is at .9664, making .9678 to .9664 an important support cluster.
Wednesday’s trade through .9700 turned the main trend down on the daily chart. The size of the break since Monday has put this market in a short-term oversold position. This could also trigger a short-term technical bounce or short-covering rally.
The basic message for traders on Thursday is to be careful chasing the USD CAD lower at current levels. Both uncertain technical and fundamental conditions make this currency pair ripe for a bottom. Although an interest rate hike is likely sooner than later, there will be time to get short, however, that may occur after a sizeable retracement rally.
About the author: Forex Mansion Analyst - James Hyerczyk
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