USD/CAD rotates at base of rising channel

USD/CAD trades at the bottom of a multi-week range after breaking back above 1.3500 on Thursday. The pair is stabilizing after its steep sell-off following the Federal Reserve’s (Fed) March policy meeting, at which officials struck a more-dovish tone than had been expected, leading to a weaker US Dollar (USD).

According to its own projections, the Fed continues to expect to make three 0.25% interest rate cuts (of 0.25% each) in 2024, in response to cooling inflation. Some analysts had expected a reduction in the Fed’s forecasts to only two rate cuts due to warmer-than-expected inflation readings at the start of the year. 

Lower interest rates are negative for a currency as they attract less inflows of foreign capital so the Fed’s persistence in expecting three rather than two cuts in 2024 led USD to sell-off, and USD/CAD to weaken. 

The Fed’s stance contrasts with that of the Bank of Canada (BoC) which has been reluctant to reveal whether or how many rate cuts it expects to make in 2024. That said,  the BoC suggests rate cuts may be on the cards, according to the last BoC meeting minutes, the Summary of Governing Council Deliberations (SGCD). 

“Members agreed that if the economy evolves in line with the Bank’s projection, the conditions for rate cuts should materialize over the course of this year. However, there was some diversity of views among Governing Council members about when there would likely be enough evidence that these conditions were in place,” says the BoC. 

One of the conditions BoC members agreed on was that they would want to see sustained easing in underlying inflation before cutting interest rates. One measure of underlying inflation is core inflation. 

Since the March meeting, core inflation data has been released, showing an unexpected cooling in February. Canadian Core CPI fell to 2.1% in February compared to 2.4% in January. Whilst on a monthly basis, Core CPI increased 0.1%, the same as in January, according to Statistics Canada.  

The data, “could lead to incrementally more dovish language from the BoC at its upcoming April 10 meeting,” said David Doyle, head of economics at Macquarie. However, Macquarie’s economists, “still see hopes for an imminent rate cut as premature.”   

With cooling inflation in Canada contrasting with warming inflation in the US the expectation would be for USD/CAD to probably rise.

From a technical perspective, USD/CAD is making slow but steady progress higher within an ascending channel. 

US Dollar versus Canadian Dollar: 4-hour chart

The pair appears to be rotating at the bottom of the range and in the process of swinging higher, though it is still too early to say whether it will rise all the way to the top of the channel again. 

If it can push above the cluster of major Simple Moving Averages in the lower 1.3500s there is a good chance it will have the momentum to continue higher to the top of the range at roughly 1.3620. A break above 1.3550 would provide a degree of bullish confirmation. 

Alternatively a decisive bear break below the lower borderline of the channel at roughly 1.3440 would signal more downside, first to 1.3420, and then 1.3370.