USD/CAD catches a bid ahead of Canadian inflation report

There was some well-grounded excitement leading into last month’s inflation report that the BOC could begin cutting interest rates in June. Yet it was the kind of report that one could see what they wanted. Annual rates of inflation continued to soften to appease doves, seeing core CPI y/y reaching the BOC’s 2% target for the first time in three years, median CPI slowing to 2.8% y/y within the BOC’s 1-3% band, and trimmed mean slowing to 3.1%. Yet on a monthly basis, core CPI rose 0.5% m/m and CPI was up 0.6%. The bump in the road on the monthly gauges were a fly in the ointment, but perhaps could have been ignored had employment data stalled. Spoiler alert; it didn’t.

Instead, employment blew past expectations by adding 90.4k jobs compared with the 20.9k expected and -2.2k prior. Unemployment also remained steady at 6.1% instead of rising to 6.2% as forecast. Perhaps hopes of a June cut may still be alive had monthly CPI reads not shot higher, but here we are. And with a key set of inflation figures released later today for Canada, I am now wondering if CPI could surprise to the upside again and strengthen the Canadian dollar.

As a reminder, traders remained heavily short CAD futures according to last week’s COT report, which is accurate up to Tuesday 14^th May close. And should today’s inflation report come in hot, there is a risk of traders covering short CAD positions and sending USD/CAD lower. Naturally the inverse is true. So if monthly inflation data is to drop notably, it could deem last month’s figures as a blip and take some of the sting out of the hot employment report. But for us to expect a BOC June rate cut to return, surely we’d need some particularly soft CPI figures later today.

As things stand:

Trimmed mean CPI is forecast to dip to 2.9% y/y, which would take it within the 1-3% target band for the first time since June 2021
Median CPI is forecast to slow to 2.7% y/y
But what we really need to see is CPI and core CPI m/m come in at 0.2% m/m and below, to keep feint hopes of a June rate cut alive

USD/CAD technical analysis:

Last week’s low found support around the 1.36 handle and value-area high of the prior rally. A series of lower wicks on the daily chart also suggest this area as strong support. And with the US dollar drifting higher towards 105 ahead of the FOMC minutes, perhaps the path of least resistance for USD/CAD is higher. At least initially.

The 4-hour chart shows a double bottom formed around 1.36 and momentum is pushing higher. RSI (14) is now above 50 to show positive momentum after forming a bullish divergence last week. Today’s view is to see dips within the 1.3607/20 range for a move towards 1.3660.

Beyond that, it is likely down to the US dollar performance as to whether USD/CAD might continue higher or roll over and have another crack at breaking 1.36 support. But if inflation data comes in uncomfortably hot, that could occur sooner than later.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.