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Canadian Dollar recovers after weak US data weighs on the Greenback


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  • Canadian Dollar recovers vs. the Greenback after ther release of US Industrial Production data shows surprise decline in output.

  • The release follows key macro data from both the US and Canada, including Canadian inflation. 

  • Canadian inflation came out lower-than expected weighing on CAD initially. 

  • Monday’s weak close reduces the technical bullishness of the reversal that started on Friday for USD/CAD.

The Canadian Dollar (CAD) recovers against the US Dollar (USD) on Tuesday, after the release of US Industrial Production data for June surprises to the downside and shows a continued shrinking of industrial output. The data follows lower-than-forecast Canadian inflation data for June, but also below-estimates US Retail Sales data. After much volatility, the Canadian Dollar has come out on top with USD/CAD trading over 0.15% lower. 

The USD/CAD pair is exchanging hands in the 1.31s during the US session.  

Canadian Dollar news and market movers 

  • The Canadian Dollar rebounds against the US Dollar after the release of US Industrial Production data shows a 0.5% decline in June when a flat 0.0% had been estimated by economists. The result is the same as May and means industrial production has declined half a percent for two consecutive months (although it has risen 0.7% from a year ago), according to the Board of Governors of the Federal Reserve System. The poor data weighs on the US Dollar (bearish for USD/CAD).  

  • The Canadian had been weakening against its US counterpart after earlier releases of Canadian Consumer Price Index (CPI) data and US Retail Sales data for June.

  • The CAD weakened after headline CPI in Canada registered a 2.8% rise in June, which was below the 3% forecast and the 3.4% registered in May. On a monthly basis inflation rose 0.1% from 0.3% forecast and 0.4% in May. Core CPI registered a 0.1% rise in the month of June, unchanged from May. 

  • Bank of Canada (Boc) Core Canadian CPI (excluding volatile Food and Energy) came out at 3.2% YoY in June against the 3.5% estimated from 3.7% YoY in May. On a monthly basis, the measure showed a fall in prices of 0.1% when a 0.5% increase had been forecast by economists from the 0.4% seen in May.   

  • The considerable decline in BoC core inflation is the main reason for CAD’s sell-off (bullish for USD/CAD) as it reduces the chances the Bank of Canada (BoC) will raise interest rates at its September meeting. Since higher interest rates are supportive for the local currency, because they attract greater inflows of foreign capital, the opposite is true of lower inflation.

  • US Retail Sales also dissapointed, however, coming out at 0.2% versus forecasts of 0.5% in June from 0.3% in May. Retail Sales Ex Autos showed a rise of 0.2% too, from 0.3% forecast. Only Retail Sales Control Group witnessed a higher-than-expected result, climbing 0.6% compared to the -0.3% decline expected. 

  • The overall lower Retail Sales data suggests consumers in the US are starting to reign in their spending which will probably reduce inflation. This makes it less likely the US Federal Reserve (Fed) will have to raise interest rates considerably higher to bring inflation under control – especially given with the softer CPI and PPI data from last week. Overall this paints a picture of a US economy that is already cooling off. 

  • Friday saw a strong reversal in USD/CAD on the back of a combination of weaker Crude Oil prices, which weighed on CAD, and much better-than-expected Michigan Consumer Sentiment data out of the US, which supported the US Dollar. 

Canadian Dollar Technical Analysis: Monday’s weak close disappoints bulls 

USD/CAD is in a long-term uptrend on the weekly chart, which began at the 2021 lows. Since October 2022, the exchange rate has been in a sideways consolidation within that uptrend. Given the old saying that ‘the trend is your friend’, however, the probabilities of an eventual continuation higher marginally favor longs over shorts.

USD/CAD appears to have completed a large measured move price pattern that began forming at the March highs. This pattern resembles a 3-wave ABC correction, in which the first and third waves are of a similar length (labeled waves A and C on the chart below). 

US Dollar vs Canadian Dollar: Weekly Chart

A confluence of support situated in the upper 1.3000s, which is made up of several longer moving averages and a major trendline, prevented last week’s decline from extending any lower and provided a foundation for the reversal on Friday and Monday.  

US Dollar vs Canadian Dollar: Daily Chart

The long green up-bar that formed on Friday is a bullish engulfing Japanese candlestick reversal pattern. When combined with the long red down bar that formed immediately before it the two together complete a two-bar bullish reversal pattern. 

However, Monday’s weak close has brought into doubt the bullish conviction in the reversal and failed to confirm the bullish engulfing. 

It will take a decisive break above the 50-day Simple Moving Average (SMA) at circa 1.3400 to refresh and reconfirm the USD/CAD long-term uptrend. Nevertheless, bulls marginally have the upper hand, with the odds slightly favoring a recovery and a continuation higher. 

Only a decisive break below 1.3050 would indicate the thick band of weighty support in the upper 1.30s has been definitively broken, bringing the uptrend into doubt. 

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.