USD/CAD: A preview of the Bank of Canada’s October Meeting
October 24, 2023 3:23 am
The Bank of Canada will hold its meeting on October 25, which is also the penultimate meeting of the year. According to the overwhelming consensus among experts, the central bank will maintain all of its monetary policy parameters as they are. However, some intrigue surrounds the upcoming meeting of central bank members. There is no doubt about the formal outcomes of the October meeting. Yet, the tone of the accompanying statement and the rhetoric of the head of the central bank may differ from those in September. Some indirect indicators suggest that it may not be in favor of the Canadian dollar due to the decreasing inflationary pressures in Canada. However, if the Canadian regulator maintains its combative stance and allows another interest rate hike in the coming meetings, USD/CAD sellers will have a significant reason for their counterattack.
Let’s be clear: the “hawkish” scenario is unlikely due to the decline in key inflation indicators in Canada in September. However, it cannot be completely ruled out. Recent statements by the head of the Bank of Canada, Tiff Macklem, have an ambiguous nature, so buyers of USD/CAD should not completely relax. The Bank of Canada could present a “hawkish” surprise in the form of a change in rhetoric.
But let’s start with the arguments against the Canadian dollar (loonie). Last week, key data on inflation growth in Canada for September were published. All components of the report ended up in the “red zone,” falling short of forecasted values. For instance, the overall Consumer Price Index (CPI) decreased by -0.1% on a monthly basis, compared to an expected increase of 0.2%. This reading entered negative territory for the first time since December 2022. On an annual basis, the overall CPI reached 3.8%, missing the forecasted 4.1%. This indicator had been showing an upward trend over the previous two months, reaching the 4.0% target. Therefore, the September result has symbolic significance.
The core Consumer Price Index, which excludes the volatile prices of energy and food, also ended up in the “red zone.” On a monthly basis, the core index fell by -0.1%, compared to an expected increase of 0.3%, and on an annual basis, it dropped to 2.8%, the lowest level since July 2021. Most experts expected this indicator to be at 3.3%.
The structure of the report indicates a slowdown in the pace of food price increases. In August, this component grew by 6.9% year-on-year, while in September, it increased by 5.8%. Commenting on this release, representatives from the Statistics Office noted that the slowing cost of living was also due to a decrease in prices for a range of goods and services (travel, durable goods, and the aforementioned food items). However, the primary pressure on inflation came from expenses related to gasoline and electricity, rent, mortgage interest payments, and dining out.
This release pleasantly surprised USD/CAD buyers. Clearly, the easing of price pressure in Canada has created the conditions for the country’s central bank to keep its key interest rate unchanged. The majority of currency strategists express confidence that the Bank of Canada will maintain the status quo.
However, many analysts caution that the country’s inflation level remains too high to be considered comfortable, despite the downward trends of recent months. During his last speech, the head of the Canadian central bank, Tiff Macklem, expressed concern about the slow pace of inflation reduction. According to him, at the October meeting, central bank members will focus on discussing a key question: whether the bank should stick to the current interest rate (5.0%) or take additional steps to restore price stability.
As we can see, despite the “red” inflation in September and the effectively predetermined outcome of the October meeting, it’s premature and unfounded to talk about an impending “rout” for the loonie. Comments from Macklem, as well as the tone of the accompanying statement, could disappoint USD/CAD buyers. If the regulator suggests the need for additional tightening of monetary policy, the Canadian dollar will significantly strengthen its position, especially in light of very cautious remarks made by Jerome Powell, the head of the Federal Reserve, last week.
But if the Bank of Canada is content with the pace of inflation reduction and states that the current monetary policy is “working as expected,” the pair will continue its northern path, at least towards the resistance level at 1.3800.
From a technical perspective, on the daily chart, the pair is in between the middle and upper Bollinger Bands lines, and above all the lines of the Ichimoku indicator (including the Kumo cloud), which shows a bullish Parade of Lines signal. This indicates a high chance that the pair will rise further. The immediate target for the upward movement is the aforementioned 1.3800 level, which corresponds to the upper Bollinger Bands line on the daily chart. The support level is the middle Bollinger Bands line on the same timeframe, at 1.3640.
The material has been provided by InstaForex Company – www.instaforex.com
The Bank of Canada will hold its meeting on October 25, which is also the penultimate meeting of the year. According to the overwhelming consensus among experts, the central bank will maintain all of its monetary policy parameters as they are. However, some intrigue surrounds the upcoming meeting of central bank members. There is no doubt about the formal outcomes of the October meeting. Yet, the tone of the accompanying statement and the rhetoric of the head of the central bank may differ from those in September. Some indirect indicators suggest that it may not be in favor of the Canadian dollar due to the decreasing inflationary pressures in Canada. However, if the Canadian regulator maintains its combative stance and allows another interest rate hike in the coming meetings, USD/CAD sellers will have a significant reason for their counterattack.
Let’s be clear: the “hawkish” scenario is unlikely due to the decline in key inflation indicators in Canada in September. However, it cannot be completely ruled out. Recent statements by the head of the Bank of Canada, Tiff Macklem, have an ambiguous nature, so buyers of USD/CAD should not completely relax. The Bank of Canada could present a “hawkish” surprise in the form of a change in rhetoric.
But let’s start with the arguments against the Canadian dollar (loonie). Last week, key data on inflation growth in Canada for September were published. All components of the report ended up in the “red zone,” falling short of forecasted values. For instance, the overall Consumer Price Index (CPI) decreased by -0.1% on a monthly basis, compared to an expected increase of 0.2%. This reading entered negative territory for the first time since December 2022. On an annual basis, the overall CPI reached 3.8%, missing the forecasted 4.1%. This indicator had been showing an upward trend over the previous two months, reaching the 4.0% target. Therefore, the September result has symbolic significance.
The core Consumer Price Index, which excludes the volatile prices of energy and food, also ended up in the “red zone.” On a monthly basis, the core index fell by -0.1%, compared to an expected increase of 0.3%, and on an annual basis, it dropped to 2.8%, the lowest level since July 2021. Most experts expected this indicator to be at 3.3%.
The structure of the report indicates a slowdown in the pace of food price increases. In August, this component grew by 6.9% year-on-year, while in September, it increased by 5.8%. Commenting on this release, representatives from the Statistics Office noted that the slowing cost of living was also due to a decrease in prices for a range of goods and services (travel, durable goods, and the aforementioned food items). However, the primary pressure on inflation came from expenses related to gasoline and electricity, rent, mortgage interest payments, and dining out.
This release pleasantly surprised USD/CAD buyers. Clearly, the easing of price pressure in Canada has created the conditions for the country’s central bank to keep its key interest rate unchanged. The majority of currency strategists express confidence that the Bank of Canada will maintain the status quo.
However, many analysts caution that the country’s inflation level remains too high to be considered comfortable, despite the downward trends of recent months. During his last speech, the head of the Canadian central bank, Tiff Macklem, expressed concern about the slow pace of inflation reduction. According to him, at the October meeting, central bank members will focus on discussing a key question: whether the bank should stick to the current interest rate (5.0%) or take additional steps to restore price stability.
As we can see, despite the “red” inflation in September and the effectively predetermined outcome of the October meeting, it’s premature and unfounded to talk about an impending “rout” for the loonie. Comments from Macklem, as well as the tone of the accompanying statement, could disappoint USD/CAD buyers. If the regulator suggests the need for additional tightening of monetary policy, the Canadian dollar will significantly strengthen its position, especially in light of very cautious remarks made by Jerome Powell, the head of the Federal Reserve, last week.
But if the Bank of Canada is content with the pace of inflation reduction and states that the current monetary policy is “working as expected,” the pair will continue its northern path, at least towards the resistance level at 1.3800.
From a technical perspective, on the daily chart, the pair is in between the middle and upper Bollinger Bands lines, and above all the lines of the Ichimoku indicator (including the Kumo cloud), which shows a bullish Parade of Lines signal. This indicates a high chance that the pair will rise further. The immediate target for the upward movement is the aforementioned 1.3800 level, which corresponds to the upper Bollinger Bands line on the daily chart. The support level is the middle Bollinger Bands line on the same timeframe, at 1.3640.
The material has been provided by InstaForex Company – www.instaforex.com
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