CAD rattled by FOMC, risk aversion

The Canadian dollar is sharply lower on Thursday, as the currency has fallen to a 4-week low. Currently, USD/CAD is trading at 1.2809, up 1.18% on the day.

FOMC signals taper is on the way

The FOMC minutes signalled that the Fed plans to scale back its monthly bond purchases, likely before the end of the year. However, the minutes indicated that any taper was not linked to a rate hike increase. Members noted that the inflation goal had been reached, making tapering possible, but that employment had not met the Fed’s benchmark of “substantial further progress”, and there would be no rate hike until this goal was achieved. The Fed has repeatedly stated that it does not plan to raise rates before tapering is completed, but felt the need to emphasize in the minutes that there was no mechanical link between tapering and rate hikes. Investors viewed the minutes as hawkish, and the US dollar has responded by pummelling the Canadian dollar.

Next week’s Jackson Hole Summit will be closely watched for further signs from the Fed regarding a taper, possibly at the December meeting. Fed Chair Powell has taken great pains to telegraph his plans and keep the market in the loop. This means that if the Fed decides on a taper, it would clearly notify the markets at Jackson Hole or at the September meeting. With investors on guard for a tapering signal, I expect sentiment towards the US dollar to remain strong next week.

With the delta variant of Covid curbing hopes of a global recovery, risk sentiment has faded, which has hurt minor currencies like the Canadian dollar. The loonie is having a dismal week, as USD/CAD is up 2.36%.

Canada ADP Employment Report Shines

Canada’s labor market has plenty of slack, but there was positive news from the July ADP employment report. The economy created 221.3 thousand jobs in July, bouncing back from the previous read of -106.2 thousand. The official July employment data, released earlier this month, showed a healthy gain of 94 thousand jobs, but this was shy of the consensus of 150 thousand.

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 USD/CAD Technical

• USD/CAD continues to rise and break above resistance lines. The pair is testing resistance at 1.2747 and the next resistance line is 1.3030
• There is support at 1.2630, followed by support at 1.2573

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/

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