USD/CAD rally resumes as BOC seen holding rates and amid US economic resilience

• Bank of Canada keeps rates on hold(as expected), continues quantitative tightening
• Fed rate hike odds for the November meeting rise from yesterday’s 39.3% to 49.5%
• BOC rate hike odds for October 25^th seen at 31.1%, with December 6^th having a 18.9% chance

USD/CAD (daily chart) as of Wednesday (9/6/23) has continued its significant bullishness from last week by surging above key resistance that has been in place since the spring.  The simultaneous release of the BOC decision and US ISM services report saw dollar strength emerge given the impressive numbers coming from the US service sector. Every economist expected the BOC to keep rates steady, while the ISM service headline reading topped all forecasts.  Following the impressive US data, the Atlanta Fed GDPNow index for Q3 remained at the elevated 5.6% level.

The US economy looks like it could outperform the Canadian economy in the short-term and that could allow further dollar strength towards the 1.3700 region. It is around that area that a confluence of resistance resides.  A potential bearish ABCD pattern lies at the 1.3740 level which also coincides trendline resistance that began during the peak of the pandemic.  If bearishness emerges, downside targets include the 1.3580 region, followed by major support at the psychological 1.3500 level.

BOC Decision

After contracting in Q2, this was an easy policy decision. The Bank of Canada kept the overnight rate steady at 5.00% and continued with its policy of quantitative tightening. If the economy over the next few months reaccelerates and if inflationary pressures remain broad-based, they could consider resuming their rate hiking cycle.

The BOC highlighted that Household credit growth slowed due to their aggressive rate hiking campaign and that tightness in the jobs market should steadily ease.  The economy was clearly impacted by a weaker China, impact of wildfires across the country, and softer spending trends.

Canada’s economy is weakening and that should do the trick for bringing inflation back to target, but a prolonged period of weaker growth seems unlikely and that might delay rate cuts bets until deeper into 2024.

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