USD/CAD Eyes Key BoC and US CPI Risks

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USD/CAD Analysis and Talking Points

  • The Bank of Canada will increase by 75 basis points
  • Small alternative to the USD at present

The BoC’s aggressive hikes come as the inflation outlook continues to deteriorate. Meanwhile, the commodity-exposed economy has been comparatively more resilient than its US counterparts, with employment also hitting record highs. In turn, the BoC’s announcement last month that it would act “more forcefully” to rein in inflationary pressures suggests that the Bank of Canada will follow in the Federal Reserve’s footsteps by raising the bank rate by 75 basis points.

Alongside this, with the MPR also in focus, the BoC is likely to remain very hawkish in its statement and signal that a 75bp hike is on the table at the September meeting. As such, this would be in line with market prices currently forecasting a 146 basis point tightening in the next two meetings.

That being said, on the USD side of the equation, the next 24 hours will see the release of the latest US inflation numbers, which as we have seen over the past month will have a key bearing on price action. short term in the markets.

Yesterday, the White House press secretary said Wednesday’s release will be “very high” so traders are positioning themselves for an upside surprise. A reminder that last month the White House press secretary expected inflation numbers to be “high”, which then saw the headline rate at 8.6% from 8.3% expected. This week, the stock is expected to rise 8.8%. The question is whether a very high impression means 8.8% or a 9% impression, both are actually very high numbers, compared to the previous ones. However, from a trading perspective, they can lead to a different market reaction with an online print likely to see the USD decline, with USD/CAD being the best way to express lower USD, while a 9% print favors another leg higher in the greenback.

From a technical perspective, the path of least resistance is the higher USD/CAD, with no alternative to the USD currently. Unless you are trading crossovers like NZD/CAD or EUR/CAD, which I expect the CAD to continue to strengthen again. USD/CAD has spent very little time above the 1.3000 handle so far, dropping to 1.3080-90 marking the May, June and July highs. However, the declines were well supported in light of the recent decline in the commodity complex. That said, if we were to see a reversal in the USD, that would be best expressed by a decline in the USD/CAD.

USD/CAD Chart: Weekly Period

Source: IG

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