USD/CAD prediction amid Canada’s gloomy business outlook


USD/CAD edged lower in early Tuesday trade as the retreating of the US dollar and Treasury yields continue to improve the risk sentiment. The Canadian dollar, which is a commodity currency, is finding support from crude oil price gains.

Amid the gloomy business outlook in Canada, BoC is expected to further increase interest rates in its next meeting. Even so, an ultra-hawkish Fed and the US dollar’s status as a safe haven will likely continue to strengthen the greenback against the loonie and other major currencies.  

Risk sentiment

No major US economic data have been released since the beginning of the week. As such, investors are still digesting the US inflation data released in the past week. The CPI numbers released by the US Labor Department signalled that inflation in the country is yet to peak.

In reaction to the data, USD/CAD rallied to its highest level since May 2020 at 1.3978. Notably, the currency pair has held steady above 1.3695 for about a week now, a level that had been evasive for years.  

Even with the steady support, the improved risk-on sentiment attracted investors to riskier assets; an aspect that lowered the demand for the US dollar as a safe haven. Commodities and US stocks edged higher while Treasury yields eased on its rally. This gave the bears an opportunity to reverse Friday’s gains with the greenback dropping by 1.15% against the loonie.

Amid the financial assets that benefited from the risk-on mood is crude oil price. Similar to other dollar-priced assets, a decline in the value of the US dollar makes oil less expensive for buyers holding other currencies. Besides, OPEC+ production cuts and revived hopes over Chinese demand offered support to the commodity. Seeing that the Canadian dollar is a commodity currency, the recorded gains in crude oil price strengthened it against the US dollar on Monday.  

Canada’s business sentiment

Surveys conducted by the Bank of Canada indicated that the business outlook was at its worst since the start of the coronavirus pandemic in 2020. Besides, inflation expectations remain high among businesses and households. Besides, there are high bets of a recession within the next 12 months amid high interest rates and price pressures.

In the ensuing sessions, traders will be keen on Canada’s CPI data set for release on Wednesday. This comes ahead of the BoC interest rate decision on 26th October. During the meeting, policymakers will likely hike rates by at least 50 basis points. While increasing interest rates will likely support the loonie, the Fed remains more aggressive in its policy tightening. Subsequently, the US dollar may remain stronger than its peers.

USD/CAD technical forecast

As shown on its daily chart, USD/CAD is still trading above the 25 and 50-day EMAs despite the losses recorded on Monday. For the remainder of the week, I expect the pair to remain above the 25-day EMA at 1.3585.

Indeed, 1.3695 remains a support level worth watching in the short term. On the upside, a rebound will have the bulls eyeing 1.3885.


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