This has been a terrible week for the commodity currencies. The Canadian, Australian and New Zealand dollars were hit hard by weaker economic data, U.S. dollar strength and in some cases, talk of FX intervention. Throughout the week, the focus has been on the more than 2.5% slide in the Aussie and Kiwi vs. the greenback. Most traders on the other hand have ignored the moves in the Canadian dollar because USD/CAD is up only 0.6%. However the more moderate sell-off in the CAD does not make the breakout in USD/CAD any less significant. In fact, USD/CAD rose to a 4 month high today whereas the AUD/USD and NZD/USD are only trading at 2 month lows. Thursday was also the first time in 2 months that USD/CAD managed to break above 1.05 in a meaningful way and with this key resistance level broken, many traders are wondering if the recent rally will turn into a new uptrend in USD/CAD or if the currency pair will fail at 1.06 once again. To address this question we look at the fundamental and technical outlook for USD/CAD.

This morning, Canada released 2 key economic reports – retail sales and consumer prices. Like many parts of the world, inflation in Canada is too low. Consumer prices dropped 0.2% in the month of October, driving the year over year rate down to a 5 month low of 0.7% from 1.1%. Excluding the declines in the cost of food and energy, consumer prices rose 0.2% but on an annualized basis CPI still slowed to 1.2% from 1.3%. Retail sales on the other hand were very strong, rising a whopping 1% in September compared to 0.1% the previous month. This would have singlehandedly reversed the rise in USD/CAD if not for the flat growth in retail sales ex autos. Excluding the largest rise in automobile sales in 4 years, consumer spending stagnated. So while confidence has reached a 2.5 year high in Canada, consumers are reluctant to spend and with low price pressures, the Bank of Canada will maintain its neutral monetary policy stance. Yesterday BoC Governor Poloz said he wanted to see inflation higher than where it is right now and this confirms they are in no rush to raise rates. Therefore rising U.S. rates should support a stronger rally in USD/CAD.

Unfortunately 1.06 is a very stiff resistance level that the currency pair has struggled with for the past 3 years due in part to the 61.8% Fibonacci retracement of the 2007 to 2008 run up. Since 2010 every attempt to break above this level flamed out. Even if USD/CAD manages to break above this level, it will resistance at 1.0650 and 1.07 but nonetheless based on the price action seen in the monthly chart, the currency pair is prime for an upside breakout that should clear 1.06.

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