The Canadian Dollar depreciated to near $1.3800 – its weakest level since mid-August, fuelled by broad dollar strength on the prospect of the Federal Reserve being perceived to be slower to lower borrowing costs than anticipated. In Canada, investors lowered bets for a 50bps BOC rate cut following a stronger than expected jobs report. The Canadian economy created 46.7k jobs in September, well above the forecast of 27k and the unemployment rate unexpectedly fell to 6.5% compared to the forecast of 6.7%. The BOC is expected to cut rates by 25bps on 23 October, in line with the last three meetings.
USDCAD has been on an upward path since early October and the rally could have continued beyond 1.380 due to USD strength. USDCAD will start to become quite expensive above 1.3800 – if oil prices strengthen and bets on a half-point rate cut by the Bank of Canada diminish. The risk premium will then be linked to the US election pre-positioning, but that also means that if Harris wins there will be enough inertia for a correction below 1.3600.
On the other hand, falling energy prices in September likely pushed Canadian inflation lower than August inflation. Headline CPI is estimated to have fallen to 1.8% y/y in September from 2% in August, while the subindex that removes the more volatile food and energy components held steady at 2.4%. The BOC’s preferred measures of core inflation (CPI trim, median and supercore) are estimated to have fallen lower overall on a three-month basis. This signals price pressures continue to ease in line with the very weak near-term economic outlook. GDP growth in Q3 is likely to disappoint, even with the population still growing at a very fast rate.
Meanwhile, in the housing market, which is typically more sensitive to interest rate changes than other sectors, the reaction so far has been relatively subdued. Preliminary reports from regional real estate boards show activity in Canada’s largest markets continued to fluctuate in September with a surge in property listings and new inventory putting little downward pressure on prices.
Governor Tiff Macklem highlighted how recent indicators show growth is not as strong as expected and they would like to see it strengthen and hold up better. Additionally, they do not want t inflation to continue falling below the target range, which suggests that a larger rate cut than what we have seen so far may be needed.
From a technical perspective, USDCAD, W medium-term sideways consolidation pattern of 1.3976 may still continue further. Although another decline cannot be ruled out, strong support will emerge above 1.2960 resistance which turns into support to generate a rebound. The rise from 1.2006 is still favourable to continue at a later stage.
On the smaller period [H8], the intraday bias remains slightly to the upside despite a slight loss of momentum. The corrective decline from 1.3945 should have completed at 1.3418. Further rallies should be seen towards 1.3845 or 1.3945. On the downside, a move below 1.3724 minor support will turn the intraday bias to neutral first. However, the bullish case will still be favoured as long as the price trades above the 1.3600 psychological level.
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Ady Phangestu
Market Analyst
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