USD/CAD eyes Bank of Canada rate decision

• Bank of Canada expected to hold rates at 5.0%

The Canadian dollar is steady ahead of today’s Bank of Canada rate decision. Early in the North American session, USD/CAD is trading at 1.3526, down 0.22%.

BoC expected to pause

The Bank of Canada has held the cash rate at 5.0% for two straight times and another pause is widely expected at today’s meeting. With inflation continuing to fall, the markets are pricing in rate cuts in mid-2024 and investors will be combing through the rate statement, looking for a shift in language from the BoC regarding the economy and inflation.

Inflation has fallen to 3.1%, a notch above the central bank’s target range of 1%-3%. A decrease in gasoline prices has helped push inflation lower and barring any major surprises, inflation could hit the 2% target in mid-2024. The BoC has declared inflation its number one priority and as inflation falls closer to target, speculation about a rate cut has increased. The fly in the ointment is services inflation, which accelerated to 4.6% y/y in October, up from 3.9% a year earlier. The BoC is unlikely to consider rate cuts until services inflation shows clear signs of heading lower.

The BoC’s tightening cycle is likely over, with inflation falling and the economy cooling down. Canada’s GDP contracted by 1.1% in the third quarter and unemployment has been moving higher. Central bankers don’t want to be pinned down in case things go sour, and Governor Macklem has repeatedly said that rate hikes remain on the table, but this seems to be lip service as current economic conditions do not warrant further tightening.

The US kicked off several days of employment reports with ADP employment earlier today. ADP is not all that reliable an indicator but can set the tone for what to expect from nonfarm payrolls, which will be released on Friday. ADP eased to 103,000 in November, below a downwardly revised 106,000 in October and well off the consensus estimate of 130,000. Nonfarm payrolls is expected to rise to 185,000 in November, up from 150,000 in October.

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USD/CAD Technical

• USD/CAD is putting pressure on support at 1.3549. Below, there is support at 1.3435
• There is resistance at 1.3610 and 1.3666

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