June 5, 2023

USDCAD: Loonie falls towards 1.3500 as Bank of Canada prepares to raise rates by 75bps

  • An improvement in risk appetite due to speculation of a Fed hike weakened the US dollar.
  • Worse-than-expected US economic data, namely consumer confidence and housing data, are headwinds for the USD, strengthening the CAD.
  • The Bank of Canada is expected to hike by 75bps, but if it moves by 50bps, the USDCAD could move towards 1.3700.
  • USDCAD is neutral to the upside, but a break below 1.3600 will send the pair towards 1.3500.

The U.S. dollar rebounded slightly as Wednesday’s Asia-Pacific session begins after Tuesday’s trading session was characterized by increased risk-on appetite, with U.S. stocks posting gains as investors speculated a Federal Reserve pivot was imminent, while the U.S. dollar weakened. Conversely, the Canadian dollar was supported by expectations that the Bank of Canada (BoC) would raise interest rates by 75 basis points in its monetary policy decision. USD/CAD is thus trading at 1.3626, which is 0.16% higher than the opening price.

The US dollar is suffering from risk exposure, weakened consumer confidence and falling US housing prices

In addition to US corporate earnings exceeding the previous quarter’s reports, the US dollar was affected by weaker-than-expected economic data. The Conference Board (CB) reported October consumer confidence weakened due to concerns about inflation and a possible recession in the United States. The index fell to 102.5 from September’s 107.8 and fell short of street analysts’ forecast of 106.5. The USDCAD dived from around 1.3700 towards the 1.3620 area on the release as consumer confidence data added to the weaker figures for the US housing market that were revealed earlier.

The US calendar revealed that the US housing market continues to cool under pressure from the Federal Reserve’s monetary policy. According to the S&P CoreLogic Case-Shiller Index, prices in 20 major U.S. cities fell 1.3% in August, the most since March 2009. Meanwhile, the Federal Housing Finance Agency (FHFA) reported in a separate report that the house prices rose by 11.9% year-on-year in August, although they remained behind July’s 13.9% increase.

US Treasury yields fell, which weakened the dollar and lifted the CAD

At the same time, U.S. Treasury yields rose, putting pressure on U.S. Treasury yields. The benchmark U.S. 10-year yield fell 14 bps from around 4.22 percent to 4.08 percent, weakening the greenback, as indicated by the U.S. Dollar Index ( DXY ). DXY fell nearly 1% on Tuesday, capitalized on by buyers of the Canadian dollar, pushing USDCAD’s losses towards a daily low of 1.3601.

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

In addition to this, the Bank of Canada (BoC) monetary policy meeting strengthened the CAD. Given that the latest BoC Consumer Survey showed business sentiment softening and price pressures easing, inflation expectations remained high, as the survey shows. Canada’s Consumer Price Index (CPI), a measure of September inflation, also rose to 6.9% year-on-year, above estimates of 6.8%, though lower than August’s 7.0%, justifying the BoC’s need for a higher rate hike.

On Wednesday, the Canadian Economic Journal contains the Bank of Canada’s monetary policy decision. On the US side, additional housing data, September building permits and new housing sales would increase downward pressure on the USD, which could be positive for the CAD.

USDCAD price forecast

USDCAD is bullish from neutral as shown by the daily chart. On Tuesday, the Loonie strengthened against the US dollar as the currency dipped below its 20-day exponential moving average (EMA) and hit a fresh three-week low of 1.3600. While the USD recovered somewhat, it is still exposed to selling pressure as the Relative Strength Index (RSI) at 50.43 continued to decline, heading towards bearish territory. This could mean sellers are gathering enough momentum to push USDCAD towards 1.3500.

Key support levels are at 1.3600, followed by the October 6 daily low of 1.3564 ahead of 1.3500. On the upside, USDCAD’s first resistance would be 1.3700, followed by the 20-day EMA at 1.3715 and the October 25 high at 1.3747.

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