The USD/CAD exchange rate moved sideways on Monday morning after the Bank of Canada (BoC) governor raised the prospects of jumbo interest rate cuts as the economy stagnates. It retreated slightly to 1.3577, a few points below last week’s high of 1.3620.
BoC rate cuts and inflation data
The USD/CAD exchange rate reacted mildly to last week’s BoC interest rate decision in which the bank decided to cut rates by 0.25%.
It brought rates to 4.25%, down from the year-to-date high of 5%, making it the most dovish central bank in the developed world.
In a statement to the Financial Times, Governor Tiff Macklem noted that the economic growth could have an impact on the next phase of cuts. He expects the bank to switch to 0.50% interest rate cuts.
The governor is worried about the weak labor market at a time when migration to Canada is rising. The most recent data showed that Canada’s unemployment rate stood at 6.6%, the highest figure since 2017. It is the highest figure in the developed market.
Macklem is also concerned about the housing market, which has become unaffordable to most Canadians. Rents have jumped while the house price index has jumped to a record high in the past few months.
He hopes that interest rate cuts will help to incentivize more housing units construction and lower prices.
Meanwhile, the Canadian economy is under pressure as the price of crude oil falls. Brent, the global benchmark, retreated to $71 while the West Texas Intermediate (WTI) fell to $67. Canada’s oil, which often trades at a bigger discount, was trading at $53 after dropping by 125 in the last 30 days and 24% in the last five years.
Canada is often affected by weaker oil prices because of the volume it produces and exports each day. Data shows that oil companies have boosted production to over 6 million barrels a day, making it the fourth-biggest producer after the United States, Saudi Arabia, and Russia.
Looking ahead, the next key USD/CAD news will be the upcoming Canadian consumer inflation data scheduled on Tuesday. Economists expect the data to show that the headline Consumer Price Index (CPI) dropped from 2.5% to 2.4% while the median and trimmed CPIs fell to 2.3% and 2.6%, respectively.
Federal Reserve interest rate decision
Like other forex pairs, the USD/CAD exchange rate will react to the upcoming Federal Reserve interest rate decision set on Wednesday.
Economists polled by Reuters expect the Federal Reserve will deliver its first interest rate cut in this meeting.
In this, the bank is expected to slash rates by 0.25% to between 5.0% and 5.25%. Other analysts anticipate the bank to cut rates by 0.50% since there are signs that the economy is not doing well at all. 50% of Polymarket participants expect a 0.50% cut while 49% see a 0.25%.
Data released this month showed that the US economy is about to get to a dire state. The numbers showed that the manufacturing and services PMIs dropped below 50 in August this year.
Another report revealed that the country’s industrial production is not doing well even as the Biden administration implemented a series of measures to stimulate the economy. For example, there are signs that the CHIPS Act is struggling as Intel woes mount.
Economists expect the upcoming data to show that retail sales dropped by 0.2% in July after growing by 1.0% in the previous month. Core sales are expected to slow down to 0.2% from the previous 0.4%.
The Fed will also cut rates because inflation has fallen while the labor market has deteriorated. Recent economic data showed that the headline Consumer Price Index (CPI) dropped to 2.5%, its lowest point since 2021. Core inflation, which excludes the volatile food and energy products, remained unchanged at 3.2%.
The labor market has also softened in the past few months, with the unemployment rate rising to above 4% in August.
USD/CAD technical analysis
The daily chart shows that the USD to CAD exchange rate peaked at 1.3945 in August and then dropped to 1.3442 earlier this month. It then bounced back and moved to a high of 1.3595, a few points above the May low of 1.3590.
The Relative Strength Index (RSI) has tilted upwards and is nearing the neutral point of 50 while the two lines of the MACD made a bullish crossover.
Also, the 200-day and 50-day Exponential Moving Averages (EMA) are about to form a death cross pattern, a popular bearish sign. Therefore, the pair will likely resume the downtrend and retest the next key support at 1.3442, the lowest point this month. The alternative is where the pair rises and retests the next psychological point at 1.3700.
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