Canadian Inflation Data Boosting the Loonie

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Canadian Inflation Data Boosting the Loonie

Today (9/19), we had inflation and wholesale sales data, after which the loonie got a boost.
CAN CPI m/m (August): 0.0%
Forecast: -0.1%
Previous: -0.2%
CAN Core CPI m/m (August): 0.5%
Forecast: 0.2%
Previous: -0.1%

CAN inflation August 2014

Wholesale Sales m/m (July): -0.3%
Forecast: 0.8%
Previous: 0.8% (revised from 0.6%)

Canadian Inflation Back Above Target:
First of all, the wholesale sales data was disappointing, but it is untimely, and not as important as the inflation data that came out. The slightly more timely inflation data showed that the CPI was flat in August, after a reading of -0.2% in July. The CPI inflation in the 12 months to August came in at 2.1%, which was the same reading in July. The Core index advanced 2.1% as well, which was up from the 1.7% reading in July. This core index is what the Bank of Canada focuses on so a rise back above the 2.0% target can have hawkish central bank implications.

USD/CAD Reaction:
Traders bought up the Canadian Dollar following the inflation data release. The 4H USD/CAD chart shows price falling from above 1.0980 to 1.0886 immediately following the release. This decline completes a head and shoulders pattern, and also pushes price below the cluster of 200-, 100-, and 50-period simple moving averages (SMAs). The bullish outlook in September is neutralized, and a bearish one is being introduced. Now, the August-September lows in the 1.0810-1.0830 area is in sight in the short-term.

USD/CAD 4H Chart 9/19usdcad 4h chart 9/19

(click to enlarge)

Watch out for Key Support:
Let’s not get ahead of ourselves though. Let’s see what happens around this 1.09 area. If price can stay north of it, the bearish outlook would still be at bay. When we look at the daily chart, we can see that the current decline is testing a key support area. The cluster of moving averages and a rising trendline from July is just below the 1.09 area. The daily RSI is still above 40 after tagging 70, so the bullish momentum is still in play.

In fact, if we see price stabilize around 1.09, we should anticipate a bullish attempt. If this bullish attempt can push above the 9/19 session high of 1.0980, then the bullish continuation scenario is in play.

USD/CAD Daily Chart 9/19
usdcad daily chart 9/19

(click to enlarge)

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.