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CAN GDP Disappoints; USD/CAD Reaction

Today, the main economic release for the Canadian Dollar (CAD) was the GDP reading for May. According to Statistics Canada, the economy contracted at a rate of -0.2% in May. This follows a -0.1% reading in April, and is the 4th month of contraction in the past 5 months. This kind of data suggests that the BoC was right in cutting rates in July, and might keep the door open for further rate cut.

CAN GDP m/m

(click to enlarge; source: forexfactory.com)

The historic chart of Canadian GDP shows that 2015 has been the worst year since 2009, which was right after the global financial meltdown. The prospect of further BoC rate cut should put the loonie under more pressure, though its recent decline can already be a symptom of the market pricing in another rate cut.

USD/CAD 4H Chart 7/31
(click to enlarge)

The 4H chart hows that the reaction to the GDP data was not immediately negative for the loonie. It reflects an uncertain volatility. It does show that there is strong selling around the 1.31 area. Seeing this reaction makes me think that if price were to eventually break 1.3105, we should see a strong rally. I would expect the rally to be around 140 pips - about the range of this last couple weeks of price consolidation pattern.

Now, if price falls below 1.2855, I would expect some kind of bearish correction perhaps back towards the 1.2640-50 area, which represents a previous support/resistance pivot area. We might even want to be more conservative with the bearish outlook, and monitor the 1.27 area which is near the 200-period simple moving average (SMA), and a previous support pivot. 

It should be noted that given the current fundamental backdrop and technical conditions, we should limit our bearish outlook, but can be more aggressive with the upside especially since price is already above the 2008-2009 high (1.3040-1.3060).