Canadian Dollar Extends Recovery After BoC Rate Hike

• The Canadian dollar continues to rally against the US dollar on Thursday after the Bank of Canada’s decision to raise rates at its meeting the day before.
• The Bank of Canada cited strong economic growth in Canada as the main reason for raising rates, fearing inflationary forces could build up.
• USD/CAD falls near June lows at 1.31, threatening a breakout, but strong support below is likely to prevent a deeper sell-off.

The Canadian Dollar (CAD) continues to rise against the US Dollar (USD) on Thursday, on the back of the Bank of Canada’s (BoC) decision to raise interest rates by 0.25% and its open, data-driven approach to the future orientation.

The USD/CAD pair is trading above 1.31 at the start of the US session.

News about the Canadian dollar and movements in the markets

• The Canadian dollar is trading higher after the Bank of Canada raised interest rates by 0.25%.

• Higher rates are positive for CAD (negative for USD/CAD) as they attract more foreign capital inflows which increase demand for the currency.

• The Governor, Tiff Macklem, stressed that future monetary policy decisions will depend on the data that is received, so it is not clear to the markets if this will be the last increase in the BoC in the tightening cycle.

• The decision to raise rates at the July meeting followed a discussion among Council members on the relative advantages of keeping rates unchanged or raising them.

• “Overall, our assessment was that the cost of delaying action was higher,” Macklem concluded.

• Turning to inflation, the BOC Governor said that while it was welcome that inflation in Canada had fallen to 3.4% in May – substantially down from 8.1% last summer – a large number of basket items The purchase rates used to calculate the Consumer Price Index (CPI) continued to rise strongly.

• “Just over half of the CPI basket components” had seen their prices rise by more than 5%, Macklem said at the press conference after the announcement. “If you look at the whole basket, meat is up 6%, bread is up 13%, coffee is up 8%, baby food is up 9%… rent is up 6%,” he added.

• Demand and consumption in the Canadian economy continue to grow, Macklem said, indicating the possibility of inflationary pressures ahead.

• The sensitive housing market had also defied expectations of a slowdown, instead showing signs of rebounding despite rising interest rates, which were driving up mortgage repayments.

• The latest labor market statistics showed that 60,000 new jobs were filled in Canada in June, more than triple the estimated 20,000. The average wage per hour increased by 3.9%, a lower percentage than the 5.1% of the previous month, but no less high for that. Report that the Unemployment Rate rose unexpectedly from 5.2% the previous month to 5.4%, above the forecast of 5.3%.

• Taken together, positive macroeconomic data from the Canadian economy has led the BOC Governing Council to make the decision to raise rates to avoid inflationary effects, rather than wait and see.

• The BOC believes that inflation will not return to its 2% target until mid-2025, some six months later than expected.

• Although the Canadian dollar rose after the BoC announcement, more and more analysts are forecasting a tougher climate for the currency in the second half of 2023.

• Analysts at the National Bank of Canada, Macquarie and Nomura Bank forecast a weakening of the CAD in the second half of 2023.

• “Our bearish view for the second half of 2023 remains based on the view that Canada will experience a more severe slowdown than the United States,” said Thierry Wizman, global interest rate and currency strategist at Macquarie Futures USA.

• Wizman cites the negative impact that rising interest rates will have on the Montreal real estate market as one of the main drivers of CAD weakness later in the year.

• “The rise in rates has already happened and households will start to feel the consequences as fixed-rate mortgages are rolled over to higher rates,” Wizman said, in a note quoted by the Financial Post.

• Nomura sees rate differentials and higher growth in the US pushing USD/CAD higher.

• The negative effect of a global economic slowdown on commodity prices negatively affecting Canada’s terms of trade is the main factor dragging the CAD lower, according to the National Bank of Canada in a note quoted on Poundsterlinglive. com.

• The US Federal Reserve is almost certain to raise rates at its meeting on July 26, given the 5.3% core CPI still prevailing in the US, which will likely boost the US dollar.

• Despite lower-than-expected inflation data on Wednesday in the US, markets measure the probability of a further rate hike by the Fed at its meeting on July 26 above 90%, though any further hike in 2023 is now less likely to see the Fed stand still.

Canadian Dollar Technical Analysis: June Lows in Danger

Despite recent weakness, USD/CAD is in a long-term uptrend on the weekly chart, which started at the 2021 lows. Since October 2022, the exchange rate has been in a sideways consolidation within that uptrend. Keeping in mind the old saying that “the trend is your friend”, however, the odds of an eventual continuation to the upside marginally favor longs over shorts.

USD/CAD appears to have completed a large measured move price pattern that began to form at the March 2023 highs. This pattern resembles a 3-wave ABC correction, where the first and third waves have a similar length (labeled waves A and C in the graph below).

The measured move in USD/CAD appears to be complete as waves A and C are similar in length. This suggests that the price probably bottomed out at the June 27 lows and is now at the start of a new bullish cycle.

US Dollar vs. Canadian Dollar: Weekly Chart

A confluence of supports below the June lows at the 1.3000 high, which is made up of several longer moving averages and a major trend line, provides support for further losses. Only a decisive break below 1.3050 would indicate that this thick support band has been broken for good, casting doubt on the uptrend.

US Dollar vs. CAD: Daily Chart

The daily chart shows that the USD/CAD rallied last Thursday to just below the 1.3400 cross, where the 50-day SMA sits, before reversing lower.

Since then it has been down all week and is now threatening the June 27 lows at 1.3117. It is possible for the price to break below those lows; however, it is unlikely to go much lower as immediately below is the confluence of support located between 1.3080 and 1.3100. Only a clean break below 1.3050 would reverse the trend and suggest a much more bearish picture for USD/CAD.

The pair will most likely retest the level of the June 27 lows and then rally again as it forms a complex bottoming pattern before finally rallying.

However, a break above the 50-day SMA will be necessary for USD/CAD to resume its uptrend. The bulls have a slight edge, with the odds slightly in favor of a rally and continuation higher.