Strong Q2, 3.1% GDP Growth Turns Greenback Bullish

Strong Q2, 3.1% GDP Growth Turns Greenback Bullish

 
The Canadian dollar has been on a roll against the Greenback since the beginning of June. An unexpected GDP growth of 4.5% in the second-quarter, two quick rate hikes, and a crude oil rally strengthened the Canadian dollar against the Greenback. The USDCAD pair hit a low of 1.2052 earlier this month – almost 1700 pips below the exchange rate recorded in April. However, due to the facts presented below, there is a high probability of a bullish reversal in the USDCAD pair.

According to the Bureau of Economic Analysis, the US economy grew at a 3.1% annual rate in the second-quarter, a notch faster than the preliminary growth estimates of 3%. For the April-June quarter, analysts had expected the growth to remain unchanged from the preliminary estimates. It is the fastest rate of economic expansion since the first quarter of 2015. In the previous quarter, the US economy grew at an annual rate of 1.2%.

The economy is expected to slow down in the third quarter due to the devastation caused by the hurricane Harvey and Irma. However, reconstruction is expected to boost the fourth-quarter GDP. The economy is expected to expand by only 2.2% in the July-September period.

The Labor Department stated that the number of people claiming unemployment benefits increased 12,000 to a seasonally adjusted 272,000 for the week ended September 23rd. It was a bit higher than analysts forecast of 269,000. However, for the 134th week in a row, the number of people claiming unemployment benefits has been below the threshold level of 300,000. It is the longest stretch since 1970.

The US Bureau of Economic analysis also stated that the trade deficit in August narrowed to $62.9 billion, from $63.9 billion last month. The market had expected a trade deficit of $65 billion.

Earlier last week, Trump unveiled the biggest US tax reform plan in three decades. If the tax reform becomes a reality, then the GDP of US is expected to increase by as much as $10 trillion over the next decade and also bring in an additional revenue of about $3 trillion to the US government. While the economic data and tax reform plan turned the Greenback bullish, the Canadian dollar turned weak due to a statement issued by the Bank of Canada’s governor.

While giving a speech titled “The Meaning of Data Dependence: An Economic Progress Report”, Poloz stated that there is no predetermined path for interest rates in Canada, as inflation and wage growth continues to remain slower than anticipated. It means that the central bank would proceed cautiously and there will be no rate hike in October.

Furthermore, the changes of a rate hike in December have also diminished. Thus, fundamentally, the USDCAD can be expected to rally further.

The USDCAD price chart indicates that the currency pair has broken the resistance at 1.2400. The RSI indicator has crossed above the reading of 50, while the momentum indicator is making new highs. Thus, we can expect the currency pair to rally further.

USDCAS - Technical Analysis - 2nd October 2017

By opening a long position in the USDCAD pair near 1.2390, we wish to gain from the current uptrend. A stop loss order will be placed below 1.2310 to keep the risk under control. Finally, we wish to book profit near 1.2740 where the next major resistance exists.

We may mimic a similar setup in the binary market by purchasing a call option valid for one week. A strike price of about 1.2390 seems suitable for the trade.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.


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