USD/CAD drops to June lows as Canada emerges from deflation

The USD/CAD pair is down by 0.30% as traders reacted to the upbeat inflation data from Canada and the overall weaker US dollar. The pair is trading at 1.3425, which is the lowest it has been since June 11 this year.

Canadian inflation rises

Consumer prices in Canada rose in June as the country continued to reopen. According to Statistics Canada, the prices rose by 0.7% year-over-year (YoY) after rising by 0.4% in the previous month. Analysts polled by Reuters were expecting the prices to jump by just 0.4%. Also, the YoY increase was the biggest gain since 2011.

The core CPI, which excludes the volatile food and energy prices, rose to 1.1% from the previous 0.7%. Analysts were expecting the prices to jump by 0.9%.

According to the statistics office, the biggest contributor to consumer prices were food and shelter. Goods prices fell by 0.2% while services rose by 1.3%.

Meanwhile, goods prices fell by 15.7%, which was a slight improvement from the previous month’s decline of 29.8%. June was the second straight month of declining gasoline prices. Meat prices rose b 8.1% while clothing prices rose by 1.0% in June.

Still, the country’s inflation is still below the 2.0% target set by the Bank of Canada. In its decision last week, the bank said that it expects inflation to stay below this target for a few years. As a result, this meant that the BOC could spend a few more years before raising interest rates.

Other economic numbers from Canada show that the country is making a steady recovery. Employment numbers released two weeks ago showed that the economy created more than 900,000 new jobs in June. That was the highest monthly gains recorded in several months. Another figure showed that the country exported goods worth more than $34 billion in June.

These numbers, coupled with the falling number of coronavirus cases in the country and higher crude oil prices mean that the economy could return to growth in the third quarter.

US dollar weakness

The USD/CAD pair is also falling because of the overall weakness of the US dollar. The US dollar index, which tracks the greenback against its peers, has dropped to its lowest level in more than a year.

That decline is mostly because of the divergence between the United States and European economies. While the US economy has made modest recovery, analysts fear that this growth will be affected by the rising number of coronavirus cases.

At the same time, the number of coronavirus cases in Europe has dropped and the economy has been supercharged by the recovery fund deal passed yesterday. In a statement, analysts at UBS said:

“We don’t expect the recent increase in COVID-19 infections to lead to the re-imposition of national lockdowns, and so we expect global economic growth to continue to recover. As a result, we expect safe- haven demand for the US currency, which was apparent in the early stages of the pandemic, to decline.”

USD/CAD technical analysis

The daily chart shows that the USD/CAD pair is trading below the 50-day and 100-day exponential moving averages. The price is also between the 61.8% and 78.2% Fibonacci retracement level. At the same time, the fast and slow stochastic oscillators have declined to the lowest levels since June. Therefore, the pair is likely to continue falling as bears target the next support at 1.3322.