Canadian Dollar loses ground on Tuesday before a key interest rate decision by the Bank of Canada.
Core Inflation has fallen substantially in Canada whereas it remains stubbornly high in the US, and this is bullish for USD/CAD.
The technical picture is mixed but slightly bullish after the break above the key src.3270 high.
Canadian Dollar (CAD) trades a few pips lower against the US Dollar (USD), on Tuesday, ahead of the key Bank of Canada (BoC) interest rate decision on Wednesday.
USD/CAD is trading in the src.32s during the US session.
Canadian Dollar news and market movers
The Canadian Dollar edges lower in a calm-before-the-storm effect as traders await the BoC Interest Rate Decision scheduled for src4:00 GMT, Wednesday, July src2.
The Core Consumer Price Index (CPI) drives interest rate decisions, and in Canada, core inflation has fallen to 3.7% from 4.src% in the last reading, placing less pressure on the BoC to continue raising rates.
Since higher rates are positive for CAD as they draw more capital inflows, a decision to leave rates unchanged would be negative for CAD, and positive for USD/CAD, which would probably rise since the Federal Reserve is, in contrast, almost certain to raise rates at its July 26 meeting, given the 5.3% Core CPI inflicted on the US.
The BoC is prone to surprising markets, however, as FXStreet Senior Analyst Yohay Elam points out in his BoC preview, so one cannot completely discount the possibility of a hike at Wednesday’s meeting.
Such a move would benefit from the advantage of surprise and probably see USD/CAD sell off substantially.
The second half of 2023 is unlikely to be as good as the first say analysts at one of Canada’s largest banks, National Bank of Canada, as the BoC will take a cautious approach to changing interest rates.
Furthermore, a global economic slowdown will weigh on commodity prices, negatively impacting Canada’s terms of trade, says the note cited on Poundsterlinglive.com.
Canadian Dollar Technical Analysis: Short-term trend giving mixed signals
USD/CAD is in a long-term uptrend on the weekly chart, which began after price rose following the 202src lows. Since October 2022, the exchange rate has been in a sideways consolidation within the uptrend. Given the old saying that ‘the trend is your friend’, however, the probabilities overall an eventual continuation higher, favoring longs over shorts.-
The pair appears to have completed a large measured move price pattern that began forming at the March 2023 highs. This pattern resembles a 3-wave zig-zag, much like an ABC correction in which the first and third waves are of a similar length (labeled waves A and C on the chart below).
USD/CAD’s measured move looks like it has completed given waves A and C are of a similar length. This suggests price probably bottomed at the June 27 lows and is now at the start of a new cycle higher.
US Dollar vs Canadian Dollar: Weekly Chart
A confluence of support situated under the June lows in the upper src.3000s, that is made up of several longer moving averages and a major trendline, provides a backstop to further losses. Only a decisive break below src.3050 would indicate this thick band of weighty support has been definitively broken, bringing the uptrend into doubt.
US Dollar vs Canadian Dollar: Daily Chart
The daily chart shows how price has now broken decisively above the src.3270 key last lower high of the prior downmove, which is a bullish sign. ¡
USD/CAD subsequently rose up to just shy of the src.3400 crossroads where the 50-day Simple Moving Average (SMA) is located, last Thursday, before reversing lower last Friday. The long green up day followed by the long red down day creates a two-bar reversal pattern which is a short-term bearish sign, however, this clashes with the other bullish indications, suggesting a balanced market.
It will take a decisive break above the 50-day SMA to keep the uptrend momentum going. Canadian Dollar bulls marginally have the upper hand with the odds slightly favoring a continuation higher.
Bank of Canada FAQs
What is the Bank of Canada and how does it influence the Canadian Dollar?
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between src-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
What is Quantitative Easing (QE) and how does it affect the Canadian Dollar?
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-srcsrc when credit froze after banks lost faith in each other’s ability to repay debts.
What is Quantitative tightening (QT) and how does it affect the Canadian Dollar?
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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