Opening the week with a cautious tone, the CAD is edging lower against the USD to start the capital markets this morning. That’s why market participants are always sharply focused on the USD/CAD currency cross. On Monday, the pair found support near the 1.3820 area trying to recover from recent market volatility. The USD/CAD is back above 1.3835. Analysts note that it is doing so inside an uncertainty triangle, with boundaries drawn at 1.3790 and 1.3885 for the time being. This triangular formation suggests that a breakout could decide the near-term direction for the pair.
The upcoming Consumer Price Index (CPI) release for August and the Bank of Canada (BoC) meeting are expected to play crucial roles in shaping the future trajectory of USD/CAD. Canadian household spending rose steeply in the second quarter. Now, according to some forecasters, mixed signals have obscured the economic outlook. Meanwhile, since 2014, Canada’s Gross Domestic Product (GDP) is in decline. This sudden decline should give anyone serious pause about the country’s current and long-term economic health.
Triangle of Uncertainty
The USD/CAD currency pair today finds itself stuck between two vital levels. All of these circumstances have created an atmosphere ripe for speculation by traders. The lower limit is currently at 1.3790, and the upper limit is at 1.3885. This setup forms a triangle pattern, which is commonly regarded as a mark of market paralysis or indecision.
Currently USD/CAD is a bit lower on the session, not surprising given the risk-off tone that’s taking over the Forex marketplace. Traders are waiting for clearer directions from economic data, especially inflationary-related indexes and signs of central bank policy shifts. Analysts think that escaping from this triangle will be important for USD/CAD’s next short-term move to materialize. This further raises the stakes for the releases of data we have coming up.
“The August CPI could be the real arbiter between the status quo and further monetary easing. The BoC is keeping a close eye on the median and trim measures, which remain around 3%, the upper limit of its target.” – RBC note.
Anticipated Economic Indicators
All eyes on calendar this week will be momentous for the Canadian Dollar. Canada comes out with its Consumer Price Index (CPI) and the US with its Retail Sales on Thursday. The simultaneous release of these reports will likely make for more volatile trading in USD/CAD. Because of this, this currency pair has quickly become one of the most watched pairs in the entire Forex market.
Those futures swaps are indicating an 81% chance of a 25 bps rate cut. This would facilitate a drop in the Bank of Canada’s policy rate to 2.5% at its next meeting. It could mark the first such monetary policy move in history to directly respond to concerns such as inflation and economic growth.
Derek Holt of Scotiabank commented on the intricacies of the current economic landscape:
“The underlying inflation trend does not call for massive rate cuts, but recent data remain fragile and subject to revision.” – Derek Holt.
Canadian Economic Landscape
Beyond worries about inflation, analysts are looking at other economic indicators that will affect CAD in the coming month. Household spending was through the roof in Canada’s second quarter. Elsewhere in the economy, there are mixed signals. Interestingly, Canada’s GDP roughly tripled during this same period, indicating some potential fragility.
On top of all that, there are encouraging signs from Canada’s housing market, which seems to be on at least a tentative rebound. This duality adds to the confusion about where the CAD is headed against the USD.
Holt further elaborated on the BoC’s cautious approach:
“The BoC won’t be able to rely on such volatile readings to adjust its policy. It will wait for more tangible evidence before deciding.” – Derek Holt.