USD/CAD sinks further on weak US data

The US dollar was pummeled on Tuesday after the US ISM non-manufacturing PMI data for August was released. This data showed a significantly slower-than-expected expansion at 51.4 against prior expectations of 55.4, and a sharp drop from the previous month’s 55.5. This August PMI for the critically-important US services industry represented the weakest expansion in more than six years, since early 2010. In addition, most of the main components of the PMI survey showed substantial drops from the previous month, including: Business Activity/Production – 51.8 down from 59.3; New Orders – 51.4 down from 60.3; and Employment – 50.7 down from 51.4. This PMI data follows closely after last week’s surprisingly disappointing ISM manufacturing PMI release, which showed an unexpected contraction.

With this PMI data combining with last week’s worse-than-expected US jobs report, the US dollar remains heavily pressured as expectations of a September rate hike from the US Federal Reserve continue to diminish. This dollar weakness can be readily seen in USD/CAD, which has been falling sharply since late last week. While some of that fall was due to a lagging US dollar, it was also partly driven by a very recent relief rally in crude oil, which helped to boost the Canadian dollar. Coming up this week are key events that are also likely to affect the Canadian dollar significantly, including the interest rate decision and statement from the Bank of Canada on Wednesday, followed by the Canadian employment change and unemployment rate for August, scheduled to be released on Friday.

From a technical perspective, the recent combination of a pressured US dollar and a relief rebound for crude oil boosting the Canadian dollar, has prompted USD/CAD to retreat sharply from key resistance at the lower border of a large wedge pattern. This retreat has extended below the psychologically important 1.3000 support level as well as the key 50-day moving average. Having done so, the next major downside target is at the 1.2800 support base, which was last hit in mid-August. With any further breakdown below 1.2800, continued downside momentum for USD/CAD could next target key support objectives at 1.2650 and then 1.2500, which is around the major low established in late April and early May.

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