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Canadian Dollar Hits One-Month High as Economic Signals Point to Dovish Fed
Summary:
From a technical analysis perspective, the move below the bull channel prompted a short-term bearish bias. We observed the potential for the price to test the 200EMA at 1.35200, where it could find support and experience an upward bounce.
EXPIRED
1.36700
ENTRY
1.34000
TGT
1.38000
SL
1.39285 +0.00062 +0.04%
--
Point
EXPIRED
1.34000
TGT
1.35904
CLOSING
1.36700
ENTRY
1.38000
SL
The Canadian dollar reached a one-month high around the 1.36 per USD level in late November, driven by a combination of weakening economic indicators in the United States and positive domestic factors. US economic signals, indicating cooling inflation and job creation, suggested a softer economy, leading to speculations of a dovish shift by the Federal Reserve. In Canada, October's inflation fell more than anticipated to 3.1%, signaling disinflation, while retail sales exceeded expectations with a growth of 0.6% in September. The favorable domestic conditions boosted risk appetite and supported the Canadian dollar.
Last week the Canadian dollar surged to a one-month high around the 1.36 per USD level, propelled by a confluence of factors shaping both global and domestic economic landscapes. The currency's strength was notably influenced by developments in the United States and positive indicators within Canada.
Internationally, the US economic indicators played a pivotal role in driving the Canadian dollar higher. Signals from the US suggested a cooling inflation rate and a slowdown in job creation, signaling a weaker economy. This, in turn, fueled expectations of a dovish shift by the Federal Reserve. The prospect of a more accommodative monetary policy in the US contributed to a weakening of the US Dollar, providing support to the Canadian dollar.
On the domestic front, Canada experienced a more favorable economic environment. In October, inflation in the country fell more than expected, dropping to 3.1%. This figure was softer than the Bank of Canada's forecast of approximately 3.5% through the middle of the following year, indicating a trend toward disinflation. The divergence between the US and Canadian inflation dynamics played a role in boosting confidence in the Canadian economy.
Furthermore, the rebound in retail sales in September added to the positive sentiment surrounding the Canadian dollar. Exceeding estimates with a growth of 0.6%, retail sales signaled increased consumer spending and economic resilience. The combination of these domestic factors heightened risk appetite among investors, contributing to the strength of the loonie.
In the currency markets, the USD/CAD pair exhibited interesting price action, closing a bearish candle below its bull channel support. This development raised questions about the potential reversal of the prevailing bullish trend. Traders and analysts were left pondering whether this marked the beginning of a broader shift in market dynamics.
From a technical analysis perspective, the move below the bull channel prompted a short-term bearish bias. We observed the potential for the price to test the 200EMA at 1.35200, where it could find support and experience an upward bounce. A suggested trading strategy involved taking a short position with a target take profit (TP) at the 200EMA. The protective stop was recommended just above the bull channel support to manage potential risks.
Key considerations for traders included the closed candle outside the bull channel, the 4-hour chart for a test of bull channel support, the sell signal with a target TP at 200EMA (1.35200), and monitoring for support at the 200EMA. The RSI indicator, positioned at 41.00 and below the moving average, provided additional support for the short bias.
As the market reacted to these dynamics, traders remained vigilant, assessing the potential impact of both global and domestic factors on the USD/CAD pair. The intricate interplay between economic indicators, technical signals, and broader market sentiments continued to shape the trajectory of the Canadian dollar, leaving market participants attentive to evolving conditions.
TRADE RECOMMENDATION
SELL USDCAD
ENTRY PRICE: 1.36700
STOP LOSS: 1.3800
TAKE PROFIT: 1.3400
EXP: 11/12/233
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Warren Takunda, a seasoned finance leader specializing in the Middle East, is a trusted senior analyst with a proven track record. As head of the finance team, he excels in financial planning, analysis, and reporting. Warren's expertise in financial modeling and investment analysis delivers valuable insights to clients.
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