USD/CAD eyes Macklem, FOMC

The Canadian dollar has edged lower on Wednesday. In the North American session, USD/CAD is trading at 1.3428, up 0.42%.

Is Canada heading towards a recession?

The Canadian consumer is in a sour mood. I don’t blame her, given the cost-of-living crisis and higher mortgage payments due to rising interest rates. Retail sales for September slipped 0.5% MoM as expected, but lower than the August gain of 0.4%. More worrying, retail sales fell by 1.0% QoQ, the first quarterly decline since Q2 2020.

The decline in consumer spending could well be a result of the Bank of Canada’s concerted effort to beat inflation with a steep rate-hike cycle, which has raised the cash rate to 3.75%. Despite this, inflation has been stickier than expected, currently at 6.9%.

The drop in retail sales will put a damper on expectations of a 50-basis point hike at the December meeting, as the Bank of Canada will likely deliver a modest 25-bp hike. Inflation, the bank’s number one priority, remains very high at 6.9%, as the BoC’s aggressive rate-hike cycle is yet to show results. The benchmark rate is currently at 3.75%, and like the Federal Reserve, there’s more life remaining in the current rate-tightening cycle.

The BoC is closely monitoring employment and retail sales data, as strong numbers will make it easier for the bank to continue hiking as policy makers look for that elusive peak in inflation. The bank will have little choice but to continue raising rates until it sees indications that inflation is peaking, and is expected to continue raising rates into next year. Higher and higher rates make it ever more difficult for the BoC to guide the economy to a soft landing without tipping into a recession.

The Canadian dollar could show stronger movement later in the day, with two key events on the calendar. BoC Governor Macklem will testify before a parliamentary committee in Ottawa, while the FOMC releases the minutes of its meeting earlier this month, where it raised rates by 75 basis points.

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USD/CAD Technical

• USD/CAD  is putting pressure on resistance at 1.3455. Next, there is resistance at 1.3523
• There is support at 1.3341 and 1.3218

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