Outlook Hinges on Inflation Data Following USDCAD Plunge

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Canadian Dollar – Talking Points

  • USDCAD sinks to key assist on continued USD weak point
  • BoC Gov Macklem opens door to smaller price hikes
  • Canadian inflation information on deck subsequent week

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Canadian Dollar Outlook: Neutral

The Canadian Dollar’s efficiency was fairly combined final week regardless of appreciable weak point within the US Dollar. While USDCAD punched decrease, different Loonie pairs struggled. The combined efficiency of the Canadian Dollar final week got here as oil costs surged increased on the again of reopening information out of China. Despite the sturdy hyperlink between oil and the Loonie, some CAD crosses fell sufferer to broader world developments.

Looking to subsequent week, the financial calendar is comparatively quiet for Canada. Wednesday will see the discharge of October inflation information, which can seemingly weigh closely on the Loonie. The Bank of Canada elected to sluggish its tempo of price hikes after a massively frontloaded price cycle, as financial information in Canada continues to chill. Next week’s inflation print may result in vital volatility in CAD pairs ought to there be a large repricing of BoC expectations.

Canadian Economic Calendar

Courtesy of the DailyFX Economic Calendar

In feedback made final week in Toronto, BoC Governor Tiff Macklem indicated that the central financial institution was open to smaller price hikes shifting ahead. While saying that charges nonetheless “have further to go,” Macklem revealed that there “could be another bigger-than-normal step or it could be reverting to more normal 25-basis-point steps, we’ll see.” Macklem’s feedback come at a vital time, as broader financial information reveals indicators of slowing however inflation information stays scorching. This is the dilemma that central bankers globally face; how far do you push in an effort to reign in inflation?

In further feedback made final week, Governor Macklem touched on the character of Canada’s tight labor market. Macklem acknowledged that labor markets should soften in an effort to decrease inflation, because the economic system stays in a interval of “excess demand.”

The Bank of Canada is preventing appreciable wage pressures, as vacancies stay elevated and wage development stays broad. The Canadian economic system added over 100k jobs in October, whereas the unemployment price remained at 5.2%. Macklem went on to state that growing labor provide is “not a substitute for using monetary policy to moderate demand and bring demand and supply into balance.”

Following final week’s US CPI print, a robust repricing of Federal Reserve price hike expectations noticed a large transfer within the USD complicated. As a consequence, USDCAD was capable of make the clear break under 1.3500 earlier than discovering assist into the Friday fixing. As extra merchants look to push the US Dollar decrease, USDCAD might stand to profit significantly. USDCAD bears have been unable to tag or shut under the 100-day shifting common at 1.3225. Price did in the end discover assist at September’s 1.3250 stage, and this confluent space might supply bears a problem of their quest for decrease costs. The story right here continues to be pushed by the Federal Reserve, however subsequent week’s inflation report in Canada might have its say in whether or not these key ranges under are damaged.

Overall, bears seem firmly in management and it might simply be a matter of time earlier than 1.3100 trades. While a countertrend rally could be painful, it can’t be dominated out given how far USDCAD has fallen in such a brief period of time. A retracement again to prior assist at 1.3400 may simply materialize earlier than the subsequent leg decrease to the 1.3000 space can start.

USDCAD Daily Chart

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Chart created with TradingView

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— Written by Brendan Fagan

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