CAD Stumbles, House Prices Look Unsustainable – Longs Suggested On USDCAD

At the beginning of the week, Canadian manufacturing recovery stepped down a gear with a monthly survey from Markit. The RBC Canadian Manufacturing PMI registered at 51.8 in June, down 0.58% from a reading of 52.1 in May. Although the index still hovered above the level of 50.0, indicating an industry expansion, the June reading represents the weakest pace of improvement since March 2016.

Moreover, Canada still has to struggle with the overheated property market. Based on data released by local real-estate boards on Wednesday (6/7), in Vancouver and Toronto, average home prices in June rose by 32% and 17% respectively, compared with the data a year ago. On a five-year basis, the average price advance in both cities was over 45%. In addition, the bank of Canada partly helped lift up housing prices with two lending rate cuts since January 2015. The significant rise in housing prices raises concerns about a potential housing bubble, which could pose a threat to the country’s financial stability. Consequently, the Canadian dollar encountered a knock-down effect against the greenback.

Nevertheless, the currency pair slowed down it loss with data from the Statistics Canada on Thursday (7/7). The value of Canadian building permits issued in May unexpectedly dropped by 1.9% from a 0.1% tick-up in April because of lower construction intentions in both the residential and non-residential sectors. Furthermore, the office of the superintendent of financial institutions, Canada’s main banking regulator, warned of tightening mortgage-lending practices due to significant home-price gains in Toronto and Vancouver markets.

Meanwhile, in the US positive data was reported ahead of the all-important U.S. jobs data later in the session. The ADP non-farm employment change strengthened to 172,000 new jobs for June, much stronger than the forecast of 158,000. The number of individuals who applied for unemployment benefits fell by 6.3% to 254,000 for the week ended on July 1. Yet, investors remain wary after the unexpected negative surprise in payrolls the previous month. Consequently, the dollar index was down 0.1% to 96.16.

The US non-farm data was reported with 278,000 jobs created during June, beating market’s expectations of 175,000 rise and hitting the largest gain in around 8 months. The average hourly earnings inched 0.1% for a year-on-year gain of 2.6%. The jobless rate also rose to 4.9% from 4.7% due to the increasing labor participation rate.

USDCAD

Fig. USDCAD D1 Technical Chart

The pair is moving in a shrinking range and now is around 23.6% Fibonacci retracement at 1.30115. As two moving averages are getting closer and much likely to cross, the pair is expected to gain bullish momentum and head up to hit the upper bar. The resistance at around 1.31000 is expected to be the turning point in case the pair cannot break out of this range.

Trade suggestion

Buy stop at 1.30220, Take profit at 1.31000, Stop loss at 1.30112

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