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Sharp Rise Was A Surprise, It's Recommended to Go Short at Highs
Summary:
Canada's CPI rose 7.6% year-on-year in July, in line with expectations but still at a high level. However, this was a step in the right direction as it was down from June's 8.1% growth rate.
CLOSED
1.29301
Opening Price
1.27700
TP
1.29850
SL
1.37175 -0.00253 -0.18%
417
Point
Profit
1.27700
TP
1.28884
Closing Price
1.29301
Opening Price
1.29850
SL
Fundamentals
Canadian inflation sub-indicators for July are as follows. Lower gasoline prices dampened inflation in July, with prices falling by 9.2% during the month, the largest drop since April 2020. Gasoline prices remain 35.6% higher than a year ago.
However, energy prices are not the whole story of inflation. Prices excluding energy still rose by 6.6% year-on-year in July due to widespread price pressures. Food inflation in particular heated up last month, with prices rising by 9.9% year-on-year, up from 9.4% in June.
Prices for a variety of travel-related services continue to rise as Canadians spend more time on holiday. Airfares rose 25.5% month-on-month, while accommodation prices rose 47.7% and catering prices rose 7.3% year-on-year in July.
In contrast, housing prices eased slightly to 7.0% year-on-year from 7.1% in June. Headline services inflation rose by 5.7% year on year.
On a seasonally adjusted basis, the headline CPI rose by 0.3% month-on-month, the smallest monthly increase since December 2021, following a 0.6% rise in June. The CPI excluding food and energy rose by 0.5%, a relatively hot figure.
Overall, headline inflation moved in a positive direction in July, but the underlying inflation indicator actually rose a step in July, above the 5% rate of growth, suggesting that the Bank of Canada still has much work to do to reduce inflation.
At its last meeting, the BoC decided to raise its key interest rate by 100 basis points to 2.50%, the largest increase since 1998, suggesting more rate hikes are on the horizon. The BoC expects inflation to remain at around 8% year-on-year at the end of the quarter and 7.5% year-on-year for the year while slowing sharply to 3.2% in the fourth quarter of 2023 and eventually reaching its target in 2024.
At the same time, the Bank of Canada lowered its economic growth forecast to 2.6% and 1.8% for this year and next, down from 3.8% and 2.9% respectively.
Nevertheless, the officials noted that the slowdown in growth was "largely due to the impact of high inflation and tightening financial conditions on consumption and household spending", justifying their view that interest rates should be raised to curb very high inflation.
The BoC was the only major central bank to raise interest rates by a single percentage point in this post-pandemic race to raise rates. However, the fallout showed that Canada lost some jobs in July. With this in mind, the market will likely be watching closely to see how the BoC will move forward with this tightening cycle.
We expect the Bank of Canada to continue to raise policy rates significantly in its next announcement in three weeks. We currently expect a 75 basis point hike, but the market seems to prefer another 100 basis point hike, which likely focused on the lack of progress on core inflation measures.
Technical Analysis
USDCAD retreated after testing the previous resistance at the 1.2934 level. However, the bulls rebounded again on the support of the previous 1.2827 level and the intraday bias turned neutral. On the upside, a firm break above the 1.2934 level would indicate that the corrective decline from 1.3222 is complete and a further rally would retest the 1.3222 high. On the downside, a break below the 1.2726 level would resume the key support from 1.3222 down to 1.2516.
In terms of structural movement, the rise during the European session was unexpected and hasty. It is recommended to go short at highs, instead of going long.
Trading Recommendations
Trading Direction: Short
Entry Price: 1.2900
Target Price: 1.2770
Stop Loss: 1.2985
Valid Until: 2022-08-31 20:00:00
Support: 1.2850, 1.2827
Resistance: 1.2927, 1.2960
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You understand and acknowledge that there is a high degree of risk involved in trading with strategies. Following any strategies or investment methodologies is the potential for loss. The content on the site is being provided by our contributors and analysts for information purposes only. You alone are solely responsible for determining whether any trading assets, or securities, or strategy, or any other product is suitable for you based on your investment objectives and financial situation.
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Master of Economics, 8 years in the financial industry, CFA holder, joined HSBC (Hong Kong) Bank in 2013 after graduating from the University of California, USA in the Investment Research and Markets Department. With years of financial market experience and trading experience, having provided excellent investment advice to many brokerages, entity derivatives importers and clients in Greater China.
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