The USDCAD currency pair experienced sharply increased volatility during Tuesday's trading session. Quotes fell below the level of 1.363 for the first time since early June, but by the end of the day the entire drawdown was bought back. On Wednesday, the price growth continued, which suggests that yesterday's reversal wasn’t accidental. Increased activity of the bulls could provide a quick return of USDCAD to 1.37, and further possible renewal of summer highs just below the level of 1.38.
The surge of traders' attention to the Canadian dollar was provided by yesterday's publication of inflation statistics for May. The figures turned out to be much worse than the consensus for both the overall and core consumer price indices. Thus, the trend of 4 months of consecutive slowdown in inflation, which allowed the Bank of Canada to start the cycle of interest rate cuts on June 5, was interrupted. However, many economists believe the acceleration in price growth is just a one-time event.
Simon Harvey, chief currency analyst at Monex, doesn't see the May report as convincing evidence of a new acceleration in inflation in Canada. In his view, virtually all of the excess price growth is due to increased housing costs. If mortgage and rental payments are excluded from the calculation, Canadian inflation is only 1.5%. Probably, the obtained data won’t allow the Bank of Canada to continue easing monetary policy at the meeting on July 24, but in fall this process will surely resume.
Meanwhile, currency market traders are increasing their bets on the weakening of the Canadian dollar. According to the latest data from the Commodity Futures Trading Commission, the volume of short positions on the Canadian currency reached 150 000 contracts with a total value of almost $11 billion. This means a record pessimism towards the Canadian dollar since 1995. USDCAD seems especially vulnerable, given the continued hawkish stance of many Fed members.
The Stochastic indicator on the daily chart of the USDCAD pair came out of the oversold zone and formed a signal for growth. Buyers can choose the level of 1.37 as the nearest target.
The following trading strategy can be suggested:
Buy USDCAD at the current price. Take profit — 1.37. Stop loss — 1.363.
Traders can also use a Trailing stop instead of a fixed Stop loss at their discretion.
This content is for informational purposes only and is not intended to be investing advice.
