USD CAD US retail sales miss badly BOC on tap tomorrow

It’s been an action-packed morning for USD/CAD traders, and the excitement is likely to carry over for at least the next 24 hours.

In the wee hours of the night, the long-awaited nuclear deal between Iran and other global powers was finally hammered out. Without getting into the potential geopolitical impact of the deal, the most salient development for traders is that the long-standing economic sanction preventing Iran from exporting oil will now be lifted. The price of oil, Canada’s most important export, initially edged lower in the wake of the announcement before rallying back to 52.50 (WTI) as of writing, showing that the market had already priced in the short-term impact of the deal.

More significantly, USD/CAD was also impacted by the June US Retail Sales report, which came out far worse than expected. Against expectations of 0.2% gain, retail sales actually contracted 0.3% m/m, with core retail sales also missing expectations at -0.1% vs. +0.7% m/m anticipated.

This represented the worst retail sales reading in four months and the reading was below the estimates of all 81 economists surveyed by Reuters. Heading into Fed Chair Janet Yellen’s semiannual Humphrey-Hawkins testimony to US Congress, the retail sales report will put a sour taste in the mouths of bulls who are still holding out hope that the Federal Reserve will raise interest rates in September.

Not surprisingly, USD/CAD pulled back from its six-year high near 1.2800 in the wake of the disappointing report. Looking to the four-hour chart, the pair has been in a general uptrend over the last month, and there is still scope for short-term weakness toward bullish trend line support 1.2650 before the trend is invalidated. Meanwhile, the secondary indicators are mixed: the MACD is still tentatively holding above the “0” level, signaling lingering bullish momentum, though the four-hour RSI is now showing a triple bearish divergence (where price has put in three higher highs, but the indicator has put in three lower highs) so far this month.

Of course, the proverbial elephant in the room is tomorrow’s Bank of Canada monetary policy meeting. Analysts are split over whether the central bank will cut interest rates this month, but regardless of the decision, BOC Governor Poloz will likely strike a dovish tone as the economy struggles to recover from a weather-induced slowdown in Q1.

If the BOC takes the proactive path and opts for a rate cut, USD/CAD could quickly regain its mojo and break out to a new six-year high above 1.2835, and in time, bulls could look to target the 11-year high near 1.3000.

On the other hand, a decision to leave interest rates unchanged may serve as a temporary setback for USD/CAD bulls, but the medium-term uptrend in USD/CAD remains healthy. Any dips toward bullish trend line support or previous-resistance-turned-support at 1.2560 may present an opportunity to join that uptrend at value.

Source: City Index