Bank of Canada starts and wins. At first, this was the case, since the BoC’s monetary restriction rate was higher than that of the Fed. However, in autumn, everything has been turned upside down. BoC has to keep up. How does this affect USDCAD? Let’s discuss the topic and make up a trading plan.
Weekly Canadian dollar fundamental analysis
Could the Bank of Canada curb inflation? According to September consumer prices data, this won’t happen. The indicator rose by 6.9%, exceeding the Bloomberg consensus forecast of 6.7%. CPI dynamics forced the futures market to increase the chances of an overnight rate hike by 75 bps to 60% at the BoC meeting on October 26th. This allowed the USDCAD bears to strengthen after reaching the long target of 1.395 announced in early October.
Before the release of inflation data, there were rumors on the market that the Bank of Canada would begin to slow down the rate of monetary restriction. However, after an important release, a lot has changed. CIBC Capital Markets experts raised their overnight rate forecast by 25 bps. Previously it was assumed that the ceiling rate would be 4%, which would be reached by the end of the first quarter. Now experts forecast 4.25% by the end of December. Moreover, the borrowing costs will not fall below 4% until mid-2024.
Inflation dynamics in the USA and Canada
Source: Bloomberg.
Capital Economics raised its overnight rate forecast too. The company analysts claim that worse inflation data for September will force the Bank of Canada to raise the rate by 75 bps at its October meeting. Bank of Montreal experts think the same, citing the hawkish remarks of Tiff Macklem and his colleagues, the weakness of the Canadian dollar, unacceptable during reverse currency wars, and the readiness of the Fed to tighten monetary restriction. In order to keep up and not further weaken its currency, the BoC will choose the 75 bps option.
Obviously, this scenario is the most anticipated and has already been priced in USDCAD. At the same time, the consolidation of the pair is due, first of all, to the transition of oil to a narrow trading range. The black stuff market can’t decide between potential supply cuts, including a reduction in OPEC+ production by 2 million b/d since November, an embargo on Russian oil since December, and global demand issues.
Dynamics of USDCAD and oil
Source: Trading Economics.
The latest PMI data suggests that business activity continues to slow down, and some of the world’s major economies, including Germany, most likely have been hit by the recession. Together with COVID-19-related problems in the Chinese economy, this puts pressure on global oil demand and its price.
USDCAD trading plan for a week
Black stuff has lost a third of its value since June, which has impacted the CAD dynamics. However, the stabilization of the situation allows traders to pay attention to the BoC monetary policy. The further fate of the pair will depend on the statements of Canadian regulator’s officials. Markets are suggesting that the overnight rate ceiling is already close. However, if they are wrong, the USDCAD correction will widen towards 1.353 and 1.341. A successful breakout of supports at 1.364 and 1.36 will be a reason to enter short trades.
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