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Summary: The USDCAD rose to around 1.3830 in the pre-New York session, exhibiting a neutral to slightly positive bias, and is poised to retest the key resistance zone around 1.3850.

Fundamentals

According to preliminary estimates from Statistics Canada, despite a renewed increase in oil and coal prices, Canadian manufacturing sales for September saw a marginal decline of 0.1% compared to August. Market expectations indicate that after seasonal adjustments, manufacturing prices in September increased by approximately 1%, implying a larger contraction in sales (excluding price effects) after a 0.7% contraction in August.

Indeed, Canada's economic growth has started to show significant signs of softening. Consumer-related industries are notably weak, with retail sales so far in the third quarter below second-quarter levels, while hospitality services (such as restaurants and hotels) remain steady. However, the cooling of global demand is also impacting supply chains and slowing down manufacturing output, with the overall economy expected to experience a modest quarterly decline again in the third quarter.

In the US, consumer spending has displayed remarkable resilience, with retail sales averaging a monthly growth of 0.5% in the third quarter, nearly double the pre-pandemic rate. October data this week will be the first signs of how this momentum has carried into the fourth quarter.

We continue to anticipate a moderation in the strong momentum of consumer spending. Meanwhile, October marks the restart of student loan repayment plans, and the US labor market conditions are starting to deteriorate. Employment growth remains positive, but the rise in the unemployment rate over the past three months is similar to what typically occurs at the beginning of a labor market downturn.

Additionally, the Fed will closely monitor the October CPI report released this Tuesday. In September, inflationary pressures saw a modest increase and broke a series of weak price growth data. However, the decline in gasoline prices is expected to lead to a year-on-year slowdown in overall CPI for October.

Support for September's core CPI came from a substantial increase in the Owners' Equivalent Rent (OER) index, but a repeat of this situation is not expected this month. As Fed Chairman Powell stated in his speech at the International Monetary Fund (IMF) yesterday, the Fed remains willing to raise interest rates further if necessary. However, we still expect the Fed to remain cautious, given the slowdown in consumer spending and deteriorating labor market conditions, before gradually shifting to rate cuts in the second quarter of next year.

Nevertheless, if the CPI unexpectedly weakens, it could once again fuel the argument for a "peak in interest rates" and potentially harm the US Dollar.

Technical Analysis

The USDCAD saw a continuous five-day rise last week, recovering most of the previous week's decline. However, it has now returned to the critical range of 1.3800-1.3862, a range that encountered strong resistance as early as March. This range also served as the foundation for the breakdown last week. Therefore, we may see bears attempting to defend their positions at least in this area.

If the bears fail to reappear here and the price closes above the 1.3840-1.3862 range in the daily chart, it could potentially pave the way for subsequent technical buying.

The overall trend has been bullish, with prices staying above the 21-day SMA and the 200-day SMA. Additionally, there is an established bullish trendline connecting major lows formed since the mid-July interest rate bottom. However, signs of a bullish reversal in the stock market and the peak in US interest rates suggest an increased risk of a bearish reversal now.

Nevertheless, the market is offering almost no opportunities for buying on dips. In terms of trading, the focus is primarily on establishing short positions.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.3740

Target Price: 1.3960

Stop Loss: 1.3600

Valid Until: 2023-11-27 23:55:00

Support: 1.3737, 1.3695, 1.3631

Resistance: 1.3856, 1.3899, 1.3979