Is USD/CAD Resuming Downtrend, As Markets Expect More BOC Rate Hikes?

USD/CAD was bearish during most of June, losing around 550 pips during the decline. But in the last week we saw a reversal above 1.31, after some soft inflation numbers from Canada, which sent this pair more than 150 pips higher. But the retrace higher stopped around the 100 SMA (green) which turned into resistance on the H4 chart. But the 50 SMA (yellow) which used to provide resistance, has now turned into support, so let’s see if sellers can push the price below this level.

According to Royal Bank of Canada (RBC), recent economic data supports another rate hike by the Bank of Canada (BoC) this month. RBC highlights the BoC’s increasing concern over whether sufficient measures have been taken to bring inflation back to the 2% target, although a lot of inflation is coming from abroad.

Crude Oil has played a positive role in this, since it has been bullish for about a week, giving support to the CAD. US WTI crude returned above $71 after dipping below $70. Other factors such as excess demand, persistent core inflation, and a resurgence in the housing market contribute to these concerns.

RBC asserts that the economic data released since the BoC’s June statement indicates the need for a rate hike in July to ensure inflation returns to the target level. However, RBC suggests that the market is currently underestimating the likelihood of a July rate hike, as market pricing has dropped from 75% to 60% despite the supportive economic data. Overall, RBC emphasizes the alignment of recent data with the possibility of a rate hike and the importance of addressing inflation concerns.

Canadian Manufacturing PMI Slips in June

• S&P Global June manufacturing PMI 48.8 points vs 49.0 prior
• May manufacturing PMI was 49.0 points
• Output, new orders and employment all declined
• Lead times posted a record improvement
• Firms commented that market demand was subdued
• Companies noted that new export orders were again down, with some firms noting lower demand from the neighbouring USA
• Confidence in the outlook remained positive
• Backlogs of work declined for an eleventh successive month in June

The anticipated weakness is starting to land. I’ve heard anecdotal reports of layoffs in manufacturing in Canada and I expect there is more to come. Commenting on the latest survey results, Paul Smith, Economics Director at S&P Global Market Intelligence said:

“The Canadian manufacturing sector turned in another subdued performance during June, with the headline PMI remaining inside contraction territory, dragged down by further falls in both output and new orders. Reports of subdued market demand, both at home and abroad, were widespread, with clients reportedly hanging back from committing to new business given the uncertain economic outlook.

“Elsewhere in the last report, the record improvement in vendor delivery times is on the one hand welcome news, adding to a sense of prevailing market stability following the disruptions of the pandemic. This has clearly helped to ensure that inflationary pressure remain under broad control. However, with a lack of market demand the principal factor behind the shortening of lead times, its hard to get away from the sense of subdued industrial performance heading into the second half of the year.”

USD/CAD Live Chart