Further slowdown of inflation in Canada supports USDCAD growth

This week, the USDCAD currency pair updated the highs reached in early August, rising above the level of 1.38. Eventually, a powerful growth wave provoked profit taking on long positions, and at the end of Tuesday's trading session quotes lost some of their gains. From the technical point of view, the price needs at least a small correction before continuing the upward movement. The USDCAD pullback to 1.374 can be used for more profitable purchases in anticipation of a return to the local top at 1.384.

The fundamental tendency to the US dollar strengthening against the Canadian currency was confirmed yesterday. The released inflation statistics for September reflected the minimum pace of price growth in Canada since February 2021. The indicator amounted to 1.6%, significantly exceeding analysts' expectations of 1.8%, down by 0.4% compared to August. On a month-on-month basis, deflation was once again observed, with the fall in prices accelerating from -0.2% to -0.4%.

Against this background, 5 of the 6 largest banks in the country called on the Bank of Canada to reduce the key rate by 0.5% at the meeting on October 23. In turn, traders increased the probability of such an outcome from 52% to more than 70%. Royce Mendes from Desjardins Group considers such actions of the Canadian regulator necessary to revitalize the economy and prevent excessively sharp slowdown in price growth.

Jayati Bharadwaj, currency strategist at TD Securities, also expects to see more aggressive steps in monetary policy easing in Canada. Inflation is getting further away from the values indicated in the current central bank forecast, forcing officials to take decisive action. As a result, the Canadian dollar becomes one of the most vulnerable G10 currencies, especially in comparison with the US monetary unit. According to TD Securities, USDCAD has a short-term upside potential up to the level of 1.39, where another correction might occur.

The RSI indicator on the daily chart of USDCAD speaks in favor of the continuation of the pullback. Relieving of the overbought condition may take place when the price drops to 1.374. Then the growth of quotes has all chances to resume.

The following variant of trading strategy can be offered:

Buy USDCAD near the level of 1.374. Take profit - 1.384. Stop loss - 1.368.