USD/CAD Sweeps Sellers as Bank of Canada Poised to Cut Rates

USD/CAD Technical Analysis

The pair remains in a broad bullish trend, well above 1.3800. The daily chart shows a 20-day and 50-day SMA crossover which indicates a sustained bull run. However, the price has a corrective downside after finding a resistance at 1.3849. If the buyers break this level, the next resistance comes at a swing high near 1.3950. The 100-day SMA also points upwards, meaning the buying pressure remains intact.

The 4-hour chart shows a mixed scenario. The marking of a fresh higher high at 1.3849 shows a potential breakout coming up in the next few days. However, the price is gradually drawing down. Though the price is well above the 20-period, 50-period and 100-period SMAs, the 20-SMA lies on top of 50-SMA and 100-SMA. It indicates the trend could be weakening.

Key Support Levels

Following are the support levels to consider:

Support 1: 1.3800 – A round number and a psychological support to provide interim support.

Support 2: 1.3746 – A swing of Oct 17 that may protect the price to go further down.

Support 3: 1.3660 – A confluence of daily SMAs and a horizontal level.

Key Resistance Levels

Resistance 1: 1.3849 – A recent swing high that rejected the rally’s further continuation.

Resistance 2: 1.3900 – A round number and psychological mark that could prevent further upside.

Resistance 3: 1.3946 – A swing high that had previously initiated a strong downtrend.

USD/CAD Fundamental Analysis

As we saw a sharp downturn in inflation to 1.6% and a slowdown in economic growth, the Bank of Canada is expected to cut a half point in its next meeting. The economy has seen shrinking for five consecutive quarters while unemployment has risen sharply to 6.5%. These factors have initiated a fear of a looming recession.

While previously, the rates were reduced to 4.25%, RBC’s analyst Nathan Janzen has predicted the rate to reach 3.25% by December. Despite this, the housing demand is soft as the higher home prices and rising unemployment weigh.

Though Canada’s inflation has fallen more swiftly than in other countries, it has spurred an economic slowdown due to higher household and mortgage resets. The Bank of Canada has a different path of easing cycle than the FOMC. Hence, the BoC’s easing may slow down too. The Canadian dollar has weakened, but it may not have significantly impacted inflation.

While most of the rate cut impact has already been factored into the bond market, mortgage holders may not find immediate relief. Aggressive rate cuts could further trigger a decline in the bond yields and mortgage rates.

Final Thoughts

The probability of a rate cut is around 90% at the moment which keeps the Canadian dollar under pressure. Moreover, Middle East situation has put a lid on the gains of oil prices. The upside bias for the USD/CAD remains intact while corrective pullbacks may occur as well.