USD/CAD Above 1.38 As Bank Of Canada Turns Softer

Posted Wednesday, October 25, 2023 by
Skerdian Meta • 2 min read

USD/CAD was bouncing in a wedge for quite some time, with highs falling and lows rising. This pair turned bullish in July as the USD gained strength, but we saw a reversal lower in the second week of September, from below 1.37, a resistance zone, and the top of the wedge, which also stopped the bullish move, as commodity dollars found some support, despite the US dollar’s resiliency, which was bolstered by strong economic data.

Today the new home sales from the US came above expectations, while the Bank of Canada is sounding dovish on the Canadian economy after keeping the overnight rate unchanged at 5.00%, as predicted, but appears to be gradually moving away from expectations of additional rate rises. According to the decision’s accompanying statement, inflation will return to 2% in late 2025, with the economy increasing at a 0.9% annual rate in 2024.

“There is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures,” the BOC statement said. “A range of indicators suggest that supply and demand in the economy are now approaching balance.” So, the picture is looking bearish for the CAD while crude Oil has turned bearish, so we will try to buy a pullback in USD/CAD .

Highlights of the Bank of Canada Statement and the MPR October 25, 2023

Bank of Canada decision: Rates held unchanged at 5.00%, as expected
Prior overnight rate was 5.00%
BOC sees “clearer signs that monetary policy is moderating spending and relieving price pressures”
“There is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures”
BOC repeated that it ” is prepared to increase the policy interest rate further if needed”
Sees inflation returning to 2% at the end of 2025 vs “mid-2025” previously
The global economy is slowing and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand
Weaker demand and higher borrowing costs are weighing on business investment
The surge in Canada’s population is easing labour market pressures in some sectors while adding to housing demand and consumption
The labour market remains on the tight side and wage pressures persist
a range of indicators suggest that supply and demand in the economy are now approaching balance
The BOC projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6% in 2025, little changed from previously
Growth in the euro area has slowed further
Cuts 2023 growth forecast To 1.2% (prev 1.8%)
2024 to 0.9% vs 1.2% prior
2025 to 2.5% vs 2.4% prior
2023 inflation to 3.9% vs 3.7%
2024 inflation to 3.0% vs 2.5% prior
2025 inflation to 2.2% vs 2.1% prior
BOC expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025
Macklem and Rogers will hold a press conference at 11 am ET

USD/CAD was trading at 1.3772 just ahead of the decision and rose to 1.3793 afterwards. The hawkish bias is still present at some degree, but all the commentary points to a slowing economy.