Trade of the week: USDCAD Waits For BoC Rate Decision

This could be a wild week for the USDCAD due to the Bank of Canada’s (BoC) rate decision on Wednesday.

A sense of tension can already be felt when observing the currency pair which remains wedged within a small range on the hourly timeframe. The USDCAD’s choppy price action and indecision are likely based on last Friday’s jobs report from both the United States and Canada which sent prices on a mini rollercoaster ride.

US employers added more jobs than expected in November, signalling that demand for new workers remained robust despite the Federal Reserve’s war against soaring inflation. Non-farm Payrolls rose by 263,000 in November, smashing the 200,000 estimates but below the upwardly revised 284,000 increase seen in October. In Canada, it was a tepid picture with the economy only adding 10,100 jobs. Although this was the third straight month of increase, the small increase was seen as having limited impacts on the Bank of Canada’s rate decision for December.

Sentiment remains bearish toward the Canadian economy with most economists expecting the country to descend into a technical recession in 2023. With the BoC already shifting into lower gear on rate hikes, this could translate to further Loonie weakness for the rest of 2022 – especially combined with the gloomy sentiment.

Before we discuss what to expect from the USDCAD over the next few days, it is worth keeping in mind that prices remain in a bearish trend on the daily charts. A minor breakout/down could be on the horizon which may pave a path south or north depending on how markets react to the final BoC rate decision for 2022.

The low down…

After peaking at 8.1% back in June 2022, Canada’s annual inflation rate has slowed over the past few months with the current rate at 6.9% in October.

Signs of easing inflationary pressures have encouraged the BoC to adopt a less aggressive approach toward rates. In fact, the central bank is widely expected to hike rates by only 25 basis points on Wednesday which could be the final one before taking a pause. The Canadian economy expanded at an annualized 2.9% on quarter in Q3 2022, which exceeded the forecast of 3.2% and marked a fifth consecutive quarter of growth. Looking ahead, economic growth is forecasted to cool to 0.5% in Q4 according to Bloomberg which will result in GDP expanding by 3.3% in 2022. In the first quarter of 2023, growth is seen contracting -0.5%. With the road ahead for the Canadian economy rocky, this may hit buying sentiment toward the Canadian dollar.

The week ahead…

It’s all about the BoC rate final rate decision for 2022 on Wednesday, December 7th which is expected to conclude with a 25 basis-point rate hike. This decision is widely expected despite the better-than-expected Q3 GDP and somewhat tight labour market.

However, much attention will be directed toward the press conference by Governor Macklem which could provide key insight into the monetary policy path for 2023. Although economic data has been painting a positive picture since the October meeting, most economists expect the country to descend into a technical recession in 2023. This sentiment is likely to keep BoC hawks at bay, reducing the possibility of a surprise 50 basis-point hike.

Other factors to watch out for…

The oil-linked Canadian Dollar (CAD) appreciated on Monday, drawing strength from OPEC’s Sunday meeting.

Oil prices edged higher after OPEC+ decided to stick with the game plan to cut output. Although production was kept unchanged, the cartel stated that it would take “immediate” action if needed to stabilise global oil markets. Another factor supporting the Loonie is the European Union imposing a price cap on Russian oil. These factors could keep the Canadian dollar buoyed ahead of the BoC rate decision.

What next for the USDCAD?

On the daily chart, the USDCAD remains in a bearish trend with prices currently bouncing within a small range. Prices are trading below the 50-day SMA but still above both the 100-day and 200-day. A solid breakdown below 1.3390 could encourage a decline toward 1.3230 and 1.3050, respectively. Should prices break above 1.3500, bulls could be inspired to challenge 1.3600 and 1.3750.