Canadian dollar muted as BoC holds rates

• Bank of Canada holds rates for third consecutive time
• US releases nonfarm employment on Friday

The Canadian dollar is almost unchanged on Thursday. In the European session, USD/CAD is trading at 1.3596, up 0.03%.

BoC pauses as expected

There were no surprises from the Bank of Canada, which maintained the cash rate at 5.0% on Wednesday. The Canadian dollar posted some gains in the aftermath of the meeting but couldn’t consolidate and was almost unchanged on Wednesday.

The BoC has now paused three consecutive times, fuelling expectations that the current rate-tightening cycle is over and done with. The markets have priced in a rate cut in mid-2024 but the BoC retained its hawkish bias at the meeting, keeping the door open to further rate hikes.

The BoC statement was crystal clear, saying that the “Governing Council is still concerned about the risks to the outlook for inflation and remains prepared to raise the policy rate further if needed”. This was a warning to the markets that the BoC remains worried about the risk of high inflation and has not shut the door to additional rate hikes.

There are two reasons why the BoC is shunning any talk of rate cuts. First, there is always the risk that inflation could rebound and force the central bank to raise rates, and backtracking on the promise of rate cuts would hurt the BoC’s credibility. Second, if the BoC were to acknowledge that rate cuts are likely in 2024, that would ease financial conditions and likely fuel higher inflation.

The US releases nonfarm payrolls on Friday. Ahead of that key release, the ADP employment report didn’t show much change, dropping to 103,000 compared to a downwardly revised 106,000 in October. However, this was well below the consensus estimate of 130,000. Nonfarm payrolls are expected to rise to 180,000, after an October gain of 150,000. If the nonfarm payrolls print misses the estimate, the US dollar will likely lose ground in Friday’s North American session.

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USD/CAD Technical

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

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