USDCAD started the week bullish with prices rising vigorously yesterday from the opening price of $1.2763 to $1.2932. The bulls managed to defend this level to the present, with prices ranging at $1.2901 during the Asian session today.
The current bullish trend for USDCAD owes much to the strong dollar index (USDX). The dollar index rose rapidly yesterday, supported by positive readings from the Prelim University of Michigan Consumer (UoM) Sentiment report. The report showed that most US citizens and other investors still reposed so much confidence in the US economy. This report strengthened the dollar index once more, pushing it back above the 106 level yesterday up till the present moment.
An increasing dollar strength favours all pairs with the USD as a base currency. Hence, USDCAD has benefited, pushing the price to the resistance level of $1.2932 before the current retracement.
The Canadian dollar (CAD) had been weak since Monday. This currency has been fading because of falling oil prices (WTI). Canada has oil as one of its major export products. Hence, a decline in oil prices affects its currency negatively. Crude oil is currently at a six-month low, with the price at $88.12 during the Asian session today after hitting a new low at $86.36 yesterday. The oil demand has fallen rapidly amidst the increased production rate. This has crashed the prices of oil since July.
The only hope for the Canadian dollar to regain strength this week rests on the outcome of its Consumer Price Index (CPI) report to be released today. This CPI reading will determine if the bulls will be attracted to this pair again or abandon it to crash more. Today’s Canadian CPI report will have four dimensions: CPI m/m, Common CPI y/y, Median CPI y/y, Trimmed CPI y/y, and Core CPI m/m.
The Consumer Price Index m/m is an important economic data used in measuring the inflation rate of a currency in the just concluded month.
Often higher inflation rates attracted the bulls to drive the currency up again with its monetary policy committee’s expectations of a possible interest rate hike during their next session. In contrast, a lower inflation rate favours the bears as bulls would disappear to other investments.
The Canadian inflation rate rose to 8.1% YoY in June, marking its highest CPI reading since 1983. This was a high jump compared to the 7.7% YoY recorded in May. This caused the BoC to hike its interest rate by 100 basis points in June, bringing its interest rate to 2.5%. The committee further stated its commitment to continue with the aggressive interest rate hike should the rising inflation rate persist. The BoC expects the inflation rate to average around 8% within the next quarter of 2022. The previous forecast was set at 5.3% in April. Here the BoC hopes to bring the rate down to 3% in 2023 and 2% by 2024.
The high rate of inflation seen in Canada in June was largely dependent on the high energy prices, which also affected the cost of transportation. However, oil prices have fallen within the last two months, and the Canadian inflation rate is expected to slow down in July.
This means we can expect a reduction in the Canadian inflation rate from the CPI report to be released today. The forecast for this data is 0.1%, while the previous record was 0.7%.
How will the CPI report affect USDCAD?
Very often, investors pay great attention to the inflation rate of a particular currency to know when it is rife to buy or sell it. Higher readings from the CPI attracted investors to a given currency in the hope of hiking the interest rate of that currency during the next monetary policy committee meeting.
Hiking the interest rate is often very attractive to investors. It attracts a massive investment into that currency ahead of time. Hence, an increase in the inflation rate on the Canadian dollar from the report today will be expected to attract more investors to purchase the Canadian dollar in the hope of benefiting from another round of interest rate hikes by the BoC during their next session. This would strengthen the Canadian dollar against its base currency of USD.
On the contrary, a reduction in the Canadian inflation rate, primarily expected today due to the current decline in oil prices, will discourage investors from purchasing the Canadian dollar. This is because a reduction in the inflation rate will likely cause the BoC to slow down in its pace of interest rate hike for the Canadian dollar. This will weaken the Canadian dollar even more against its base currency, the US dollar, and other pairs matched to it.
Forecast for USDCAD ahead of the inflation report
USDCAD has more vital fundamental factors supporting the bulls than the bears. There is more potential for this pair to break above the current resistance at $1.2932.
However, the outcome of the CPI reading is an essential factor in determining the next direction for this pair today.
Higher reading from the CPI report today will strengthen the Canadian dollar. This means we can expect a decline in USDCAD with the target as the next support level at $1.2771.
Alternatively, if the report comes lower, which is the most anticipated, we can expect more weakness for the Canadian dollar. This will support the current bullish movement for USDCAD. Hence, we might witness a break above the present resistance at $1.2932. The price could go even above $1.30, especially if a massive reduction in the inflation rate is seen today.
