Something must be sacrificed to defeat inflation. A tough job market, a strong economy, and high household debt make the Bank of Canada’s task easier. However, this does not help the USDCAD bears. Why? Let’s discuss the topic and make up a trading plan.
Canadian dollar fundamental analysis for today
Central banks are aware that it is impossible to stop inflation without sacrifices. The pain of the labor market and the economy is the price to be paid. Another thing is that the Fed’s task is easier than the ECB’s. However, the position of the Bank of Canada is even better, but this does not help the USDCAD bears much yet.
11 out of 12 Wall Street Journal experts predict that the BoC will raise its overnight rate by 75 basis points to 2.25% at its July 13 meeting. This is the most aggressive monetary restriction since 1998, resulting in the indicator reaching a neutral zone of 2-3%. After that, borrowing costs will neither stimulate nor cool the economy. The futures market predicts that the overnight rate will reach 3.5% by the end of the year. The federal funds rate will be approximately at the same level. The BoC’s monetary restriction rate is no slower than that of the Fed. However, this does not help the USDCAD bears, as the pair has grown by more than 3% since the beginning of the year.
The determination of Tiff Macklem and his colleagues is driven by higher-than-expected inflation and an excessively tight labor market. In May, consumer prices in Canada rose by 7.7%. According to Bloomberg experts, the figure will exceed 8% in June. This is higher than the BoC’s estimate of 5.8% at the end of the second quarter.
Dynamics of inflation in Canada and BoC’s forecasts
Source: Bloomberg.
At the end of May, unemployment fell to 4.9%, the lowest level since 1976, and wage growth accelerated from 3.9% to 5.2%. Pandemic aside, this was the fastest increase since 1997, which forces the Bank of Canada to act aggressively. Yes, employment decreased by 43.2 thousand people, but this drop most likely indicates the voluntary dismissal of Canadians. The last indicator fell by 100 thousand.
Dynamics of Canadian employment
Source: Bloomberg.
The BoC’s task looks simpler than that of the Fed, as Canada’s household debt is one of the highest in the world. Rising borrowing costs will force them to spend less, reducing domestic demand and slowing inflation. On the other hand, in this case, recession risks in Canada will be higher than in the US.
The same rate of monetary restriction of the Fed and the Bank of Canada is a strong argument in favor of USDCAD stabilization. However, the US dollar can push the pair’s price up in other ways. Safe-haven demand helps the USD amid fears of a global recession, while the oil correction puts pressure on the CAD.
USDCAD trading plan for today
BoC’s aggressive hawkish stance following a rate hike by 75 basis points and the slowdown in the US inflation is a reason to enter USDCAD sales following the breakout of support at 1.298. However, if Tiff Macklem shows hesitation and consumer prices in the US continue to accelerate, enter purchases after a breakout of resistance at 1.305.
Price chart of USDCAD in real time mode
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