USD/CAD: outlook for July 17-21

USD/CAD fell below 1.2680 in the past week after the Bank of Canada raised its benchmark rate by 25 basis points to 0.75%. While markets had priced in a rate hike, the central bank’s a much more hawkish rhetoric was a real surprise for them and busted the CAD further. The neutral tone delivered by Fed Chair Janet Yellen during her testimony to the US Congress has also resulted in a rapid depreciation of the USD. A relative surge in oil prices has also contributed to the Loonie’s appreciation.

At their recent meeting, the BOC’s officials dismissed the lack of inflation as temporary. But following the rate increase they will likely become more data dependent trying to assess the impact of policy tightening in the context of heightened household indebtedness. This makes the next week’s inflation data very important. A print below market expectation might result in Loonie’s depreciation. Another focus will be on the Canadian foreign security purchases and manufacturing sales coming on Monday and Wednesday respectively. From the US we will get the US empire state manufacturing index on Monday, some housing data on Wednesday and Philly Fed Manufacturing index on Thursday.

USD/CAD is trading near 1.2725 now. As Stochastic is still in the oversold area there might be an extension of the recent rebound towards the resistances at 1.2820, 1.3015. A return of quotes below the Wednesday’s low of 1.2678 and subsequent breach of this level would allow us to target lower levels. But in the short-term, the following scenario will unlike realize.