USDCAD – Loonie Gains Momentum Post Disappointing US inflation Data & Boost in Oil Price

USDCAD has been on steep bearish decline for last two trading sessions. The Canadian dollar continues to improve and posted considerable gains yesterday. In the North American session, USD/CAD was trading at 1.2770 down 0.66% on the day. On the release front, yesterday’s focus was on inflation indicators on both sides of the border. In Canada, the New Housing Price Index remained unchanged at 0.0% matching the forecast. Over in the US, consumer price index indicators remained weak. CPI rebounded with a gain of 0.2%, but fell short of the estimate of 0.3%. Core CPI edged lower to 0.1%, shy of the forecast of 0.2%. Oil prices remain at their highest level in 3-1/2 years which helped boost the Canadian currency considerably.

USDCAD Falls

President Trump’s announcement that the US would withdraw from the Iran nuclear deal, as well as increasing tensions in the Middle East have raised concerns of supply disruptions. Brent crude climbed to $77.87 in Thursday’s Asian session after Israel struck dozens of military targets in Syria on Wednesday. Analysts predict this rally in favor of Canada to continue in short term as they believe that with oil prices above $70/bbl the exchange rate between the pair should be around 1.25 handle.

While the Bull Run is expected to have great impact in short term market, there may not be any long term support in favor of the loonie as Bank of Canada continues to maintain dovish stance relating to its interest rate decision owing to concerns with household debt and very little progress in NAFTA talks that could favor Canada. Investors currently expect 88% chance of rate hike during July 11 policy decision with max increase in interest rate of up to 25bps. Before the pair could reach 1.25 prices handle the pair faces stiff support on multiple levels at 1.2726 / 1.2692 / 1.2666 respectively. For Canadian dollar to reach 1.25 handle and gain stability, current Bull Run in Oil price should continue in long term with price above $70 and support could also come in form of investors choosing to funnel funds into Oil related investments in Canada. In US macro calendar, investors expect dovish outcome in Michigan Consumer expectations and consumer sentiment data, a better than expected results would results in US dollar trying to regain its bull momentum from earlier this week. The pair faces resistance at 1.2799 / 1.2910 / 1.2995 respectively.