USDCAD: Loonie to fall towards 1.3500 as Bank of Canada prepares to hike rates 75bps

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  • Improved risk appetite due to speculation of a Fed pivot weakened the US dollar.
  • Weaker-than-expected US economic data, namely consumer confidence, and housing data are headwinds for the USD, bolstering the CAD.
  • Bank of Canada is expected to rise 75bps, but if it rises 50bps, USDCAD may go higher towards 1.3700.
  • USDCAD has a neutral to bullish bias, but a break below 1.3600 will send the pair looking towards 1.3500.

The US dollar recovers some ground as Wednesday’s Asia Pacific session kicks off, following Tuesday’s trading session characterized by increased risk appetite, as shown by US stocks posting gains as investors they speculate that a Federal Reserve pivot is imminent, while the US dollar weakens. In contrast, the Canadian dollar was supported by expectations that the Bank of Canada (BoC) would raise interest rates by 75 bps in its monetary policy decision. Therefore, USD/CAD is trading at 1.3626, up 0.16% from its opening price.

The US dollar is affected by the risk-on mood, weaker consumer confidence and the fall in US house prices.

In addition to US corporate earnings beating previous quarter reports, the US dollar was hit by weaker-than-expected economic data. The Conference Board (CB) reported consumer confidence for October, which declined due to growing concerns about inflation and a possible recession in the United States. The index fell to 102.5 from 107.8 in September and missed street analysts’ forecasts of 106.5. USDCAD dipped on the release from around 1.3700 towards the 1.3620 area as consumer sentiment data added to weaker US housing market figures revealed earlier.

The US calendar revealed that the US housing market continues to cool, weighed down by the Federal Reserve’s monetary policy stance. The S&P CoreLogic Case-Shiller Index reported that prices in 20 large US cities fell 1.3% month-on-month in August, the biggest drop since March 2009. At the same time, the Federal Housing Finance Agency (FHFA, for its acronym in English), in a separate report, showed that prices increased by 11.9% year-on-year in August, although they were lagged by increases of 13.9% in July.

US Treasury yields fell, weakening the USD and boosting the CAD

Meanwhile, US bonds rose, weighing on US Treasury yields. The benchmark US 10-year note rate plunged fourteen basis points from around 4.22% to 4.08%, weakening the dollar, as shown by the US Dollar Index (DXY). ). DXY lost nearly 1% on Tuesday, capitalized on by Canadian dollar buyers, extending USDCAD’s losses towards its daily low of 1.3601.

The Bank of Canada is expected to raise the bank rate by 75 bps

Apart from this, the upcoming Bank of Canada (BoC) monetary policy meeting boosted the CAD. As the latest BoC Consumer Survey showed business confidence softening and price pressures easing, inflation expectations remained high, as the survey shows. In addition, Canada’s consumer price index (CPI) for September, a measure of inflation, rose 6.9% year-on-year, above estimates of 6.8%, although lower than 7.0% in August. , which justifies the need for further interest rate hikes by the BoC.

On Wednesday, the Canadian economic docket will feature the Bank of Canada’s monetary policy decision. On the US front, additional housing data, with September building permits and new home sales, would add further downward pressure on the USD, which could be positive for the CAD.

USDCAD Price Forecast

USDCAD has a neutral to bullish bias as the daily chart shows. On Tuesday, the Loonie strengthened against the US dollar as the exchange rate fell below the 20-day EMA, hitting a fresh three-week low at 1.3600. Although the USD recovered some ground, it remains vulnerable to selling pressure as the Relative Strength Index (RSI) at 50.43 extended its decline, pointing towards bearish territory. That could mean that the sellers are gathering enough momentum to push the USDCAD towards the 1.3500 figure.

Key support levels lie at 1.3600, followed by the 6th Oct daily low at 1.3564, ahead of the 1.3500 figure. On the other hand, the first resistance for USDCAD would be the 1.3700 mark, followed by the 20-day EMA at 1.3715 and the Oct 25 high at 1.3747.

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