Canadian Dollar reverses lower after US labor market data supports USD

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• The USD recovers ground after the release of mixed US data, including strong labor statistics.
• Canadian Dollar gives back gains generated earlier from bullish outlook for Crude Oil. 
• The expectation that the BoC will have to keep interest rates higher for longer compared to the Fed is a factor underpinning CAD. 

The Canadian Dollar (CAD) loses ground against the US Dollar (USD) on Thursday, after the release of a slew of US macroeconomic data releases, including a lower-than-expected Initial Jobless Claims print.

The CAD had risen in early trade on the back of bullish expectations for Crude Oil, Canada’s primary export. The possibility that the Bank of Canada (BoC) may keep rates higher for longer to combat persistent inflation was another factor supporting CAD as market expectations that the US Federal Reserve (Fed) will cut rates relatively earlier, in H1 of 2024, persist. 

The USD/CAD pair trades in the 1.31s during the US session.  

Canadian Dollar news and market movers 

• The Canadian Dollar is falling versus the US Dollar (USD/CAD falling),  with early gains given back after the Greenback strengthened following the release of a slew of US macro data, on Thursday. 
• US Initial Jobless Claims in the week ending July 14 came out at a lower-than-expected 228K, easily beating the 242K forecast and the 237K previous. The data shows continued resilience in the US labor market that is expected to feed through into maintaining stubbornly high inflation. This in turn is likely to keep the Fed hawkish for longer, lifting and maintaining interest rates and supporting the Greenback. 
• Continuing Jobless Claims did not fare so well, rising to a higher-than-forecast 1.754M versus the 1.729M estimated, from 1.721M previously. 
• The Philadelphia Fed Manufacturing Survey for July fell to a lower-than-expected -13.5 when a -10 had been forecast from -13.7 previously. 
• Existing Home Sales in the US fell by -3.3% compared to the 0.2% gain in May. The 4.16M sales was also lower than the 4.2M forecast by economists. 
• In Canada labor market data showed a rise of 2.5% in Employment Insurance Beneficiaries Change in May compared to the -0.5% reduction in April. 
• A more positive outlook for global Oil prices, Canada’s premier export, is a factor supporting CAD. 
• China is importing record amounts of – especially Russian – Crude Oil, according to analysis by the Financial Times, cited by Oilprice.com. 
• Chinese imports of Russian Oil totalled 2.13M barrels per day in H1 2023, helping Russia oust Saudi Arabia from the top spot as the world’s largest Oil exporter. 
• Imports to China surged 45.3% YoY in June alone, to the “second highest monthly figure on record”, according to Oilprice.com, “as refiners continued building up inventories despite weak domestic demand.”    
• China’s accumulation may be a sign Chinese Oil traders are building inventory because they foresee a rally ahead for the commodity. 
• Crude Oil prices may be basing and preparing for a rally, according to analysis by DailyFX.com. 
• WTI Crude Oil has broken and consolidated above a key downtrend line suggesting it could be pausing before another leg higher. 
• The US Federal Reserve is still almost certain to raise interest rates by 0.25% at its July 26 meeting, according to the CME FedWatch Tool. The highest chance of another rate hike after that is in November, when the tool assigns a 29% probability to the event. 
• The Bank of Canada is 20% liable to raise interest rates at its next meeting in September, however, sticky inflation, according to the BoC’s recent forecasts, may keep rates higher for longer going forward. 
• The Fed, on the other hand, is foreseen potentially cutting interest rates in early 2024, and it is possible this expectation of future divergence between the two central banks is another factor helping propel CAD higher (USD/CAD lower). 

Canadian Dollar Technical Analysis: Returning to critical support level

USD/CAD is probably 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 favor an eventual continuation higher and 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 also complete a two-bar bullish reversal pattern. 

The Relative Strength Index (RSI) is converging bullishly with price at the July lows when compared to the June 27 lows. At the June 27 lows, RSI was lower than in July despite price being higher. This suggests underlying strength and is a bullish sign. 

Monday’s weak close, however, failed to provide confirmation for the reversal, and since then, the price has been pulling back down. 

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. 

Alternatively, 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.