Canadian dollar to strengthen on strong inflation data

The decline in the price of crude oil to $52.70, from $54.50 weakened the Canadian dollar, which is a commodity currency, against other major currencies.

In particular, the Loonie fell sharply against the safe haven currency Swiss Franc. The demand for Swiss Franc also increased due to political uncertainty in the Europe, caused by the rise of nationalist leader Marine Le Pen in France. The country is due to face election in a month’s time.

All these events led the CAD/CHF pair to a low of 0.7540 last week. While the Canadian dollar is in a long-term downtrend, there are multiple reasons, which are provided underneath, to forecast a short-term bullish trend reversal.

Aided by transportation and shelter index, the consumer prices in Canada increased 0.9% m-o-m in January. In the previous month, Statistics Canada reported a 0.2% m-o-m decline in the consumer prices. The figures were higher than analysts’ anticipation of a 0.3% increase. It is the highest reported inflation in more than two years.

CNBC

Similarly, Canada’s GDP grew 0.3% m-o-m in December, 2016 and in line with analysts’ expectations. In November, the economy expanded by an upwardly revised 0.5%. In particular, goods-producing industries rose 0.5% in December. Including this, goods-producing industries have reported a growth in six of the past seven months.

One of the main reasons for the investors to shy away from the Canadian dollar is the ‘Border Adjustment Tax’ proposed by Trump. According to this plan, a tax of about 20% would be levied on goods imported from countries which have a substantial trade surplus with the US. However, economists argue that it is quite a complex subject and even the Trump administration has postponed it for the time being.

In the case of Switzerland, the GDP grew by only 0.1% in the fourth-quarter of 2016. It was much below the market’s expectation of a 0.5% growth. According to the Federal Statistical Office, in the previous quarter, the country grew by an upwardly revised 0.1%. The retail sales continue to remain on a descending path in Switzerland. On a y-o-y basis, the retail trade turnover declined 1.4% in January. In the earlier month, the retail sales declined 4.1%. On the basis of facts provided above, we expect the Canadian dollar to rally against the Swiss Franc in the short-term.

Technically, the CAD/CHF pair has found support at 0.7520. The RSI oscillator is out of the bearish zone and has made a positive divergence with the price. This indicates a high probability of a technical bounce back. Thus, a trader can expect the cross to reach the next resistance level of 0.7620.

By opening a long trade, a Forex trader can profit from the anticipated uptrend of the CAD/CHF pair. The long position can be taken near 0.7520, with a compulsory stop loss order below 0.7460. The profit can booked near 0.7620.

A call option should be purchased by a binary trader to capitalize on the anticipated uptrend of the CAD/CHF pair. The trader can increase the probability of success by purchasing the contract when the currency pair trades near 0.7520. It would also be beneficial if the trader selects a date around March 13th as the contract expiry date.

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