Another uptick in Canada’s Consumer Price Index (CPI) may rattle the near-term rebound in USD/CAD as it puts pressure on the Bank of Canada (BoC) to deliver another rate-hike over the coming months.

The BoC may continue to implement higher borrowing-costs as ‘the level of GDP is now higher than the Bank had expected,’ and Governor Stephen Poloz and Co. may prepare Canadian households and businesses for another rate-hike at the next meeting on October 25 as the central bank notes that ‘there has been a slight increase in both total CPI and the Bank’s core measures of inflation, consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack.’

As a result, the shift in USD/CAD behavior may continue to unfold throughout the second-half of 2017, but a below-forecast CPI print may encourage a more meaningful correction in the exchange rate especially as the Federal Open Market Committee (FOMC) embarks on a more aggressive approach in moving away from its accommodative stance.

Impact that Canada’s CPI report has had on USD/CAD during the previous release

July 2017 Canada Consumer Price Index (CPI)

USD/CAD 5-Minute Chart

Canada’s Consumer Price Index (CPI) increased for the first time since January, with the headline reading climbing to an annualized 1.2% from 1.0% the month prior. Nevertheless, the core rate of inflation held steady at 1.4% per annum during the same period, but signs of budding price pressures may encourage the Bank of Canada (BoC) to further normalize monetary policy in 2017 as the central bank warns ‘the factors behind soft inflation appear to be mostly temporary.’ The Canadian dollar rallied followed the print, with USD/CAD slipping below the 1.2600 handle to end the day at 1.2583.

Bullish CAD Trade: Headline & Core Inflation Picks Up in August

• Need a red, five-minute candle following the report to favor a short USD/CAD trade.
• If market reaction favors a bullish loonie position, sell USD/CAD with two separate lots.
• Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward.
• Move stop to breakeven on remaining position once initial target is met, set reasonable limit.

Bearish CAD Trade: Canada CPI Falls Short of Market Expectations

• Need a green, five-minute USD/CAD candle to favor a short loonie position.
• Implement the same setup as the bullish loonie trade, just in reverse.

Potential Price Targets For The Release

USD/CAD Daily Chart

(Click on image to enlarge)

• USD/CAD may continue to retrace the decline from the summer months as the 1.2080 (61.8% expansion) region offers support, while the Relative Strength Index (RSI) deviates with price and threatens the bearish formation from earlier this year.
• In turn, dollar-loonie may make a more meaningful attempt to break out of the downward trending channel from May, with a close above the 1.2350 (38.2% expansion) hurdle raising the risk for a move back towards the former-support zone around 1.2440 (23.6% expansion).
• Keep in mind the broader outlook for USD/CAD remains tilted to the downside as the pair fails to preserve the bullish formation from 2012.
• Interim Resistance:1.2770 (38.2% expansion) to 1.2830 (38.2% retracement)
• Interim Support: 1.1890 (78.6% expansion) to 1.1920 (May 2015-low)

USD/CAD Retail Sentiment

Retail trader data shows 69.4% of traders are net-long USD/CAD with the ratio of traders long to short at 2.27 to 1. In fact, traders have remained net-long since June 07 when USD/CAD traded near 1.3498; price has moved 8.6% lower since then. The number of traders net-long is 8.7% lower than yesterday and 11.0% lower from last week, while the number of traders net-short is 7.0% lower than yesterday and 5.8% higher from last week.