The USD/CAD exchange rate has retreated sharply in the past few weeks as the Canadian dollar rally has gained momentum and the greenback has fallen across the board. The pair peaked at 1.3946 in August and has retreated to 1.3537.
Bank of Canada decision
The USD to CAD pair will be in the spotlight on Wednesday as the Bank of Canada (BoC) delivers its interest rate decision.
Economists believe that the bank will continue cutting interest rates now that the economy and inflation are slowing. If this happens, the bank will cut rates by 0.25% and bring them to 4.25%, down from this year’s high of 5.0%.
The BoC has been the most aggressive interest rate cutter this year in the developed world. It has done that as inflation retreated to 2.5% in August, down from 7.6% after the Covid-19 pandemic.
Central banks typically slash interest rates when inflation eases in a bid to supercharge economic growth. In Canada’s case, recent data showed that the economic growth was slowing.
According to the statistics agency, Canada’s GDP rose by 0.9% in the second quarter. It has grown by less than 1% in the last four consecutive quarters.
Canada is also having other weak macro numbers. For example, the country’s unemployment rate has risen slowly in the past few months. It rose from 6.4% in July, its highest point since 2022 and higher than last year’s low of 5.0%. Analysts expect this week’s jobs numbers to show that the rate rose to 6.5% in August.
Canada’s home prices have also continued rising, mostly because of weak inventories and high immigration rates. Recent data showed that Canada’s new housing price index rose by 0.2% in July and analysts expect that prices will up by nearly 6% in the coming years.
Therefore, the Bank of Canada believes that cutting interest rates will help to stabilize the economy by lowering borrowing costs. It also hopes that these cuts will devalue the loonie a bit, a move that is not happening.
A weaker local currency is often good for Canada because it often boosts the country’s exports by making them more affordable abroad.
Hedge funds and other speculators are starting to pare back their short bets against the Canadian dollar. Last week’s Commitment of Traders (CoT) report by the CFTC showed that hedge funds have a $8 billion short bet against the loonie, as the currency is popularly known. The short bet peaked at $14 billion in August.
At the same time, the options market is still bullish on the currency, with wagers that it will continue rising to a record high.
Therefore, the USD/CAD pair will likely react modestly to the BoC decision unless the bank makes a major change. Besides, the interest rate cut has already been priced in by market participants.
The USD/CAD pair is also reacting to the prices of crude oil. Brent crashed to $73, its lowest point this year while the West Texas Intermediate (WTI) fell to $70 a barrel. Crude prices have a modest impact on the loonie because Canada is one of the biggest exporters.
The next important loonie news will be Friday’s jobs report, which will provide more color on the state of the Canadian economy.
US NFP data ahead
The USD to CAD exchange rate rose slightly even after a report by ISM and S&P Global confirmed that the economy was slowing.
These two reports showed that the manufacturing PMI numbers softened in August as the sector remained in a contraction mode. The two organizations will release the services PMI figures on Wednesday.
The services sector has recovered at a faster pace than the manufacturing one in the United States and other developing countries.
Meanwhile, the Bureau of Labor Statistics (BLS) will publish the closely watched jobs report on Friday.
Economists expect the data to reveal that the unemployment rate retreated to 4.2% in August as the economy added 145k jobs.
These numbers are important because the Fed is now focusing fully on the labor market since inflation has softened a bit.
USD/CAD technical analysis
The daily chart shows that the USD to CAD pair peaked at 1.3946 in August and has now retreated by almost 3% to 1.3588.
It has remained below the key support level at 1.3588, the lowest swing on May 16. The pair has also retreated below the 50-day and 200-day Exponential Moving Averages (EMA), which are about to form a death cross, a popular bearish sign.
Therefore, the pair will likely retest the key resistance level at 1.3588 and then resume the downtrend. If this happens, the USD/CAD price will then drop and retest last month’s low at 1.3442.
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