Canadian dollar in focus as traders eye CPI retail sales and oil prices

The Canadian dollar has been among the weakest of currencies in G10 in recent days. The sell-off has been sparked by the Bank of Canada’s Governor, Stephen Poloz, who on Wednesday said the central bank “actively” discussed the prospects of adding more stimulus into the economy, but in the end decided to keep rates unchanged. The market interpreted this as a sign that the BoC has turned dovish again and this view was supported further by the fact the central bank downgraded its growth outlook. The market is probably now expecting to see a potential rate cut at some point in the coming months should the Canadian economy deteriorate further. This worry could keep the Canadian dollar under pressure going forward, though if oil prices bounce back, which seems likely to me, then this may limit the downside a little.

Positive expectations for Canadian data = scope for disappointment is high

Today’s key economic data, as it happens, is from Canada at 13:30 BST or 08:30 ET which means that the CAD could move sharply once again today. Canada’s headline Consumer Price Index (CPI) is expected to have rebounded by 0.2% in September after declining by a similar amount in each of the prior two months. Core CPI, which in Canada excludes 8 most volatile items, have been basically flat in the previous three months, but in September it is likewise expected to have risen by 0.2 per cent. Retail sales have been a disappointment too in the past couple of months, falling by 0.1% each time. But like the consumer inflation figures, retail sales are expected to have bounced back strongly in September: the headline figure by 0.5% and the core figure by 0.4%.

Given the high expectations for the consumer inflation and retail sales data, there is scope for disappointment which means the Canadian dollar could fall further. Needless to say, a strong set of numbers may see the CAD find some relief, especially if oil prices bounce back today after falling sharply the day before amid profit-taking.

There’s something for everyone: GBP/CAD, EUR/CAD and USD/CAD

Speculators are spoilt for choice when it comes to trading the Canadian dollar as several CAD pairs are trading at or near important technical levels. Bullish speculators may as well try to express their views on the currency against a weaker rival such as the euro, which has been falling sharply after the ECB denied it had discussed tapering QE. Conversely, CAD bears may wish to express their views on the currency against a stronger rival, such as the US dollar, which has been rising sharply in recent days as the Fed looks almost certain to raise rates in December due to improving data and rising probability that Hillary Clinton will become the next US president, with Clinton being deemed by some as dollar-friendly. And for those who feel the low may be in for the British pound and are feeling bearish on the Canadian dollar, then the GBP/CAD may be a good pair to trade which has reached a long-term support level as we discussed on Wednesday.

Technical outlook: EUR/CAD and USD/CAD

The EUR/CAD’s break sub 1.4380 key support was short-lived on Wednesday. As a result it formed a hammer candlestick pattern, which correctly pointed to a rally that took place by the very next day. The EUR/CAD then pulled back sharply from the previous point of reference at 1.4570, to trade near the high of Wednesday’s candle at the time of this writing. The bulls will now want to see price go back above short-term resistance at 1.4480, which, if seen, could lead to a continuation of the move higher, potentially towards 1.45650, which was previously support and resistance, or even higher towards the top of the range at 1.4925 in the coming days. However, if the EUR/CAD breaks back and holds below the key 1.4380 then that would be a bearish outcome. In this potential scenario, the next bearish objectives could be the low from Wednesday (1.4265), followed by the Fibonacci levels shown on the chart. The key support is the December low at 1.4045, where the 161.8% Fibonacci extension level of the most recent up move also comes into play.

Meanwhile, the USD/CAD has recently been putting in higher highs and higher lows, often after deep retracements which suggests large institutional investors are probably buying the dips. More recently, on Wednesday, the Loonie formed a nice bullish hammer candle at key support and 61.8% Fibonacci retracement at 1.3000/10 area, which correctly pointed to bullish follow-through which took place on Thursday and to a lesser degree today. The USD/CAD has now tested the backside of the broken short-term bullish trend line and it has reacted there, which makes technical sense. Today’s Canadian data could spark the next move, so watch the short-term support levels at 1.3210 and 1.3140 closely. The key resistance area remains at 1.3295-1.3315 where the previous attempts to break higher have failed. A breakout above this area would be very bullish in my view.