In the last few weeks, the USD/CAD rate fell sharply as the Canadian Dollar rally gained momentum. The greenback also dropped across the board. In August, the pair reached a high of 1.3946. It has since fallen to 1.3537.
Bank of Canada Decision
On Wednesday, the Bank of Canada will announce its rate decisions.
The bank is expected to continue reducing interest rates, now that inflation and the economy are both slowing. The bank would then cut interest rates to 4.25% from the current high of 50%.
This year, the BoC was the first developed country to cut interest rates aggressively. The BoC has cut rates aggressively this year, as the inflation rate fell to just 2.5% after August’s Covid-19 pandemic.
In order to boost economic growth, central banks usually lower interest rates as inflation falls. Recent data in Canada showed a slowdown of the economy.
The Statistics Agency reports that Canada’s GDP increased by 0.9% during the second quarter. In the four previous quarters, it has grown less than 1%.
Canada also has other macro-numbers that are weak. The country’s employment rate, for example, has slowly increased in recent months. The rate rose to 6.4% from its lowest point of last year, 5.0%. Analysts anticipate that this week’s employment numbers will show a rate of 6.5%.
Canada’s housing prices continue to rise, mainly due to low inventories and high rates of immigration. Canada’s housing index increased by 0.2% last month, according to recent data. Analysts expect prices to rise by 6% over the next few years.
The Bank of Canada is of the opinion that lowering interest rates can help stabilize the economy. The Bank of Canada also hoped that the cuts would devalue the Loonie, but this has not happened.
It is usually beneficial for Canada to have a weaker currency because this makes exports more accessible abroad.
Hedge funds, as well as other investors and speculators, are beginning to reduce their short positions against the Canadian Dollar. The CFTC’s Commitment of Traders report from last week showed hedge funds had a short bet of $8 billion against the Canadian dollar, or loonie as it is commonly known. In August, the short bet reached a peak of $14 billion.
The options market remains bullish, betting that the dollar will rise to new heights.
The USD/CAD will therefore likely respond modestly to BoC’s decision unless it makes a significant change. The market has already priced in the rate reduction.
USD/CAD is also responding to crude oil prices. Brent fell to $73, the lowest level of this year, while West Texas Intermediate (WTI), fell to $70 per barrel. The loonie is not affected by crude prices because Canada exports a lot of oil.
Next up, the Friday jobs report will give us more information on how the Canadian economy is doing.
US NFP data ahead
Even after a S&P Global and ISM report confirmed that the US economy is slowing, USD/CAD rates rose a little.
The two reports show that manufacturing PMIs dipped in August, as the industry remained in contraction. Both organizations are scheduled to release their services PMI numbers on Wednesday.
In the United States, and in other developing nations, the services sector recovered faster than manufacturing.
The Bureau of Labor Statistics will release the highly anticipated jobs report this Friday.
The data is expected to show that unemployment fell to 4,2% in August, as the economy created 145k new jobs.
The Fed has shifted its focus to the labor market, as inflation is no longer as high.
USD/CAD Technical Analysis
Daily chart showing USD/CAD pair has fallen almost 3% from August’s peak of 1.3946 to today’s 1.3588.
The pair has been trading below its key support at 1,3588. This was the swing low on 16 May. It has also retreated beneath the 50-day Exponential moving average (EMA) and the 200-day EMA, which is about to form a Death Cross. This popular bearish signal.
The pair is likely to retest its key resistance at 1,3588, and resume the downward trend. The USD/CAD will drop to the low of last month at 1.3442 if this occurs.
The post USD/CAD hedge funds reduce loonie-short bets before BoC’s decision first appeared on ICD
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