USD/CAD drops to fresh bear cycle lows on US CPI miss, eyes on 1.3180

• USD/CAD is pressured on a soft US CPI print ahead of the BoC.
• USD/CAD bears are squeezing longs back to test below 1.3200 support.

USD/CAD is blowing off following a large deviation in the US Consumer Price Index that arrived (YoY) in June at 3.0% (vs. the expected 3.1% and the previous 4.0%. The core data was a larger miss of 4.8% vs. 5% expected and the prior 5.3%. For the month, it arrived at 0.2% vs 0.3% expected and the 0.4% prior.

USD/CAD was testing the London and Asian lows below 1.32 the figure within the range of between 1.3233 and 1.3197 so far. Markets are in the process of reviewing US Dollar forecasts and today’s CPI inflation release is one of the factors that is being considered. 

Short-term weak US Dollar, longer-term not

Analysts at Rabobank explained that the USD tends to perform weakly when US rates are low and the outlook for global growth is good. ''In this scenario appetite for higher-yielding risky assets is high. Currently, China’s economic recovery has disappointed. Soft demand for manufactured goods in addition to pressures on domestic consumption in China stemming from factors such as falling property prices and higher youth unemployment have resulted in lacklustre growth,'' the analysts explained. ''Germany’s exposure to China through its external sector and a weak performance for its own manufacturing sector suggests low growth in the Eurozone.''

All in all, in this view, the analysts explained that this low-worth growth outlook is likely to keep risk appetite in check and lend support to the safe-haven USD medium term. ''Thus, while a soft US CPI inflation report today is set to weigh on the USD near-term, we do not anticipate that this will mark the start of a long-term trend of sustained USD selling.''

Bank of Canada eyed

The next catalyst for USD/CAD will be the Bank of Canada. The central bank is expected to hike another 25bps to 5.00% in July. Upward revisions in the July MPR would be expected to provide the main catalyst.

''We're wary of chasing the strong CAD story in the short-term as positioning looks elevated,'' analysts at TD Securities said. ''Still, the USDCAD downside will require the data to comply with our out-of-consensus view on US CPI tomorrow and a BoC hike. If realized, expect a near-term test of the recent lows ahead of 1.31.''

USD/CAD daily charts

Despite the recent rally through the prior resistance structure of 1.3270, the bears have moved in again and are squeezing longs back to test below 1.3200 support. The price is back to 1.3230 but the volatility and break of 1.3200 opens the risk of a move to 1.3182 which guards a run towards 1.3120.