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Strong Canadian CPI contrasts with recent data

Market Analysis

USDCAD, H1 and Daily

Canada CPI slowed to a 1.7% growth rate in January (y/y, nsa) from the 1.9% pace in December. CPI surged 0.7% on a month comparable basis (m/m, nsa) after the 0.4% drop in December. The annual and month comparable growth rates overshot projections (median +0.5%, +1.5%), realizing the upside risk around this report. A 7.8% bounce in gasoline prices during January relative to December drove the CPI higher. The slowing in the annual growth pace was due to an easy comparison with an elevated January of 2017 level. As for the core measures, the CPI-trim grew 1.8% y/y from a revised 1.8% (was +1.9%), the CPI-median expanded at a 1.9% clip from 1.9% and the CPI-common grew 1.8% from 1.6%. While an easy annual comparison muted the annual price gain in total CPI, this report underpins expectations for more rate hikes from the BoC this year. However, disappointing growth and employment data are consistent with a cautious, gradual approach to rate increases. Two more 25 bps moves this year, in July and October, are widely anticipated.

All Canadian crosses traded on the direction pointed by the strong Canadian CPI data. The beat on CPI expectation, encouraged USDCAD bears to push Loonie back to 61.8% retracement Fibonacci level from December fall, by breaking the immediate support level at 1.2624, which was Wednesday’s low and last week’s strong resistance level. However a bearish signal and a possibility of a trend reversal in a Daily timeframe, could turn our attention, only on the break below the next support level at 1.2550, but ultimately on the break below the 20-DAY SMA, at 1.2510.

Meanwhile, the short term picture is positive despite the  bearish long legged candle seen on the data release. The recent hourly candle is formed by a small body and a long down leg, suggesting that there is limitation to the downwards momentum. Momentum indicators confirm this scenario of an ending of the down movement shortly. In the hourly chart, RSI popped up from the oversold territory, and stochastic slopes above neutral zone. The MACD signal line is still moving above neutral, while the MACD histogram (presenting the strength of the trend) is weak. Currently, the pair is  traded back inside the Bollinger Bands pattern.

Therefore, this spike lower on the data could be consider as a corrective move on this long term upwards move of the Loonie since February 2. Next intra-day Resistance levels come at 1.2710
(20-period SMA in th ehourly chart and 200-DAY SMA in the daily term)  and 1.2750. Meanwhile support is at today’s low, at 1.2615.


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Andria Pichidi

Market Analyst


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