USDCAD Rate Eyes Monthly High Ahead of Canada CPI, Fed Rate Decision

USDCAD Rate Eyes Monthly High Ahead of Canada CPI, Fed Rate Decision

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Canadian Dollar Talking Points

Fresh developments coming out of Canada may influence USDCAD ahead of the Federal Reserve interest rate decision as the Consumer Price Index (CPI) is anticipated to show a downtick in the headline reading for inflation.

USDCAD Rate Eyes Monthly High Ahead of Canada CPI, Fed Rate Decision

USDCAD appears to be making a run at the monthly-high (1.3383) despite the reaction to the Saudi attack as the exchange rate fills the gap from the start of the week.

Image of DailyFX economic calendar

In turn, updates to Canada’s CPI may fuel the recent rebound in USDCAD as price growth is anticipated to slow to 1.9% from 2.0% per annum in July.

Image of Bank of Canada interest rate

Signs of slowing inflation may drag on the Canadian Dollar as it puts pressure on the Bank of Canada (BoC) to insulate the economy, but Governor Stephen Poloz and Co. appear to be in no rush to alter the forward guidance for monetary policy as “growth in the second quarter was strong and exceeded the Bank’s July expectation.”

As a result, the BoC may stick to the same script at the next meeting on October 30, and the Federal Open Market Committee (FOMC) rate decision is likely to play an increased role in driving USDCAD price action as Chairman Jerome Powell and Co. remain under pressure to reverse the four rate-hikes from 2018.

Image of Fed Fund futures

Keep in mind, Fed Fund futures have shown narrowing expectations for back-to-back rate cuts, with market participants now pricing a 50% probability for a 25bp reduction in September, but recent remarks from St. Louis Fed President James Bullardsuggests the central bank will take additional steps to insulate the US economy as the 2019-voting member on the FOMC insists that the committee “should have a robust debate about moving 50 basis points” at its quarterly meeting.

With that said, a Fed rate cut along with a dovish forward guidance may rattle the recent rebound in USDCAD, and the diverging paths for monetary policy may heighten the appeal of the Canadian Dollar versus its US counterpart as the exchange rate snaps the upward trend carried over from the previous year.

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USD/CAD Rate Daily Chart

Image of usdcad daily chart

Source: Trading View

• Keep in mind, the broader outlook for USDCAD is no longer constructive as it clears the February-low (1.3068), with the break of trendline support fostering a bearish outlook for the exchange rate.

• At the same time, the rebound from the 2019-low (1.3016) appears to have stalled ahead of the Fibonacci overlap around 1.3410 (38.2% expansion) to 1.3420 (78.6% retracement), with the Relative Strength Index (RSI) offering a bearish signal as the oscillator snaps the bullish formation from July.

• However, the lack of momentum to break/close below the Fibonacci overlap around 1.3120 (61.8% retracement) to 1.3130 (61.0% retracement) may spur a run at the monthly-high (1.3383), with the move above 1.3220 (50% retracement) bringing the 1.3280 (23.6% expansion) to 1.3330 (38.2% retracement) region back on the radar.

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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