After 9 straight days of steady to positive performance, we’ve finally experienced a down day in USD/CAD that could mark the beginning of a deeper correction down to 1.2550/1.2500. No major Canadian economic reports were released this past week but the pair was lifted by short covering, the sell-off in risk currencies and $50 resistance in oil. Fundamentals still support a stronger currency and with US CPI surprising to the downside, there could be a stronger recovery in the Canadian dollar and in turn a sell-off in USD/CAD this coming week. The only piece of Canadian data worth watching is CPI which we expect to be positive for the currency as the price component of latest IVEY PMI report increased sharply over the previous month. If inflation and employment conditions strengthen, loonie traders will start to argue for another Bank of Canada rate hike this year.
Technically, the latest rally in USD/CAD stopped right at the 23.6% Fibonacci retracement of the May to July sell-off. This puts the pair at risk of falling to at least the 20-day SMA near 1.26. If USD/CAD rises to 1.2800, then the next stop should be the 38.2% Fib near 1.2950.
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