Canada’s economy has continued to improve since the BoC meeting last June. Based on the labor market and broader economy data is gradually improving, after being helped by the stimulus measures of the BoC and the Canadian government.
This is what was expected by the BoC in the last meeting. At that time, policymakers noted that the worst point of the crisis was probably behind them, but they also warned of high uncertainty about how the recovery would rollout.
The Bank of Canada will complete a policy meeting later today, with no new policies expected. Although the Canadian economy is recovering, the increase in the number of new US infections is frightening given the connection with Canada. Taking this into account, policymakers can strengthen their easing bias, which would protect negative reactions to the Canadian Dollar.
Things might go well and according to plan in Canada, but nothing happens across the border in the US, without impacting Canada. As new infections soar in America, this will be a threat that will disrupt economic recovery because health problems might make consumption decline or worse, forcing more states back into lockdown. About 3/4 of all Canadian exports are aimed at the US market, so the fate of Canada’s economy is bound together with the USA.
The BoC remains cautious overall, as the deteriorating US outlook threatens Canada’s recovery as well. From a risk management perspective, it makes more sense for the BoC to strengthen its commitment to support the recovery, or be prepared to act further, if needed.
Apart from all this, most of the short-term direction of CAD will depend on global risk sentiment. In the long run, if the US is able to control the plague, it does not rule out a strong rally at the USDCAD. The Canadian currency has strengthened since the fall in March offset by strong oil price increases.
USDCAD continues to drift this week. Yesterday, the pair was trading around 1.3600. On the fundamental side, US inflation improved in June. The main figure rose 0.6%, while core reading increased to 0.2%. The inflation rate reflects economic activity, so the June figure is good news, that the US economy is showing signs of recovery.
The Bank of Canada will set the Overnight Rate at the monthly policy meeting today. The central bank is expected to keep its key interest rate at 0.25%, since it was pegged in March. Investors will focus on the bank’s interest rate statement, and the tone of the statement can affect the direction of the USDCAD.
After an 11.2% decline in GDP in April, the Canadian economy is slowly improving. This is reflected in the June employment figures, creating 950k jobs. If the release of future economic data is still positive, the Canadian Dollar could strengthen.
The USDCAD intraday bias is still neutral, consolidating between 1.3485-1.3715. Breakout minor resistance 1.3715, will target the FE 100 level (1.3855) and FE 161.8% of the measurement (1.3315 / 1.3685 / 1.3485). On the negative side, a break of 1.3485 will target 1.3315 for the short term, while prices are still moving within the EMA 200 range, with up channel and MACD support in the buy zone. However, the price has been consolidating for quite a long time, (over 4 weeks) and is awaiting further stimulus.
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Ady Phangestu
Market Analyst – hfindonesia
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