USDCAD: Under-the-Surface Strength in US GDP Could Target 11-Year High

<p>While it’s typically the marquee event for any given week (if not the whole month), yesterday’s FOMC monetary policy statement was a bit of a […]</p>

While it’s typically the marquee event for any given week (if not the whole month), yesterday’s FOMC monetary policy statement was a bit of a dud (see “FOMC Instant Reaction: “Nearly” There, but “Further” Improvement Needed” for more). The central bank made only small tweaks to its monetary policy statement, careful not to tip the scales in the increasingly important “September vs. December” debate over liftoff for interest rates. The dollar saw a bit of a recovery after the report, but all in all, traders expecting substantial volatility were disappointed yesterday.

Thankfully, market participants also had today’s Q2 US Advance GDP estimate to look forward to, and as it turns out, that report was far more instructive on the US economy’s performance than the typically-opaque FOMC statement. US GDP rose at a 2.3% annualized rate in the second quarter, slightly below the 2.5% reading expected, but just about every other aspect of the report was better than anticipated. Q2 GDP was powered by the consumer, with personal consumption rising at 2.9%, better than the 2.7% growth rate expected. The strong reading in this more sustainable growth source shows strength underneath the surface of the headline number. Most importantly, the Q1 GDP estimate was revised sharply higher, from -0.2% annualized up to +0.8%, showing that the Q1 slowdown was not nearly as bad as many economists feared. The simultaneous initial weekly jobless claims report was also generally solid, printing at 267k after last week’s historically low 255k reading.

Of course, all US economic reports are immediately filtered through the lens of Fed policy, and though today’s GDP reading is unlikely to lead to a dramatic shift in interest rate expectations, it lends a bit of support to the hawks. Looking ahead, next week’s NFP report will absolutely essential, with traders looking for 250k jobs and an uptick in average hourly earnings to help bolster the case for a September rate hike.

Pair to Watch: USDCAD

For its part, USDCAD briefly set an 11-year high above 1.3060 on Friday, but bulls opted to book profits at that level, leading to a pullback to the 20-day MA around 1.2860 yesterday. From there, buyers stepped back in to support the pair, creating a clear Bullish Pin Candle*, or hammer formation, on the daily chart; for the uninitiated, this pattern shows an intraday shift from selling to buying pressure and is often seen at near-term bottoms in the market. While the lagging MACD indicator has started to roll over, it is still well above the “0” level and the RSI has also pulled back from overbought territory, potentially clearing the way for another leg higher.

From here, all eyes will be on last week’s high in the 1.3060-1.3100 zone; if bulls are able to muster enough strength to break that barrier, a strong continuation to 1.32 or higher could be in play. The overall bias will remain generally higher as long as oil prices remain subdued and USDCAD holds above previous-resistance-turned-support near the 1.2800 handle.

*A Bullish Pin (Pinnochio) candle, also known as a hammer or paper umbrella, is formed when prices fall within the candle before buyers step in and push prices back up to close near the open. It suggests the potential for a bullish continuation if the high of the candle is broken.

USDCADDAILY7-30-2015 8-49-16 AMSource: City Index

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.