USDCAD Hits 2-Yr Highs After Canadian Inflation Data

Inflation slows more than expected

According to Statistics Canada's figures released on Tuesday, consumer price index (CPI) inflation in Canada decreased from 7.6% in July to 7% in August. This figure was less than the 7.3% market forecast.

In contrast to experts' expectations of 6%, the Bank of Canada's (BOC) Core CPI, which excludes volatile food and energy costs, decreased to 5.8% on an annual basis from 6.1% in July.

The numbers appear to have delayed expectations for the BoC to tighten policy more aggressively, which, together with the lack of movement in crude oil prices, has continued to erode the Loonie's commodity-linked value.

On the other hand, the USD seems supported by the rising US yields, with the 2-year yield attacking the psychological level of 4% for the first time since October 2007, while the 10-year US yield jumped above 3.5%, the highest level since April 2011.

"CPI data is marginally negative for CAD since the implication here is that the BoC may not need to keep racing alongside the Fed to jack rates up. In any event, this report does not warrant a huge reaction here; our bias remains for CAD underperformance," economists at TD Securities said after the data.

Trend remains bullish

There is an excellent continuation triangle pattern on the one-hour chart, currently being broken to the upside. Therefore, the long-term uptrend might continue.

The next target for bulls is expected at 1.3350, the current cycle high, followed by the psychological level of 1.35. Heading into the FOMC decision on Wednesday, the USD might continue to outperform.

On the downside, the immediate support is seen near previous highs at 1.3315; if not held, we could see a decline toward the short-term uptrend line at 1.3250.