USD/CAD trades below mid-1.3900s as USD softens ahead of the Trump-Xi meeting

USD/CAD edges lower during the Asian session on Thursday amid a modest USD downtick.
Reduced bets for December Fed rate cut offset the BoC’s hawkish cut and support the pair.
Traders now await the highly anticipated Trump-Xi meeting for some meaningful impetus.

Haresh Menghani FXStreet

The USD/CAD pair struggles to capitalize on the previous day's goodish rebound from the 1.3890-1.3885 region, or the lowest level since September 25, and edges lower during the Asian session on Thursday. Spot prices currently trade below mid-1.3900s, or the 200-day Simple Moving Average (SMA), though the fundamental backdrop warrants caution before positioning for an extension of the downfall witnessed over the past two weeks or so.

The Canadian Dollar (CAD) continues to draw support from the Bank of Canada's (BoC) hawkish outlook, which, along with a modest US Dollar (USD) downtick, exerts some downward pressure on the USD/CAD pair. The BoC lowered its benchmark interest rate for a second straight meeting on Wednesday, but also signalled that the monetary easing cycle may now be over. This helps offset subdued Crude Oil prices and acts as a tailwind for the commodity-linked Loonie.

The USD, on the other hand, is seen extending the previous day's late modest pullback from an over two-week high touched in the aftermath of the Federal Reserve (Fed) hawkish rate cut on Wednesday. The US central bank, as was expected, lowered borrowing costs by 25 basis points for the second time this year, citing concerns about a softening labor market. However, Fed Chair Jerome Powell pushed back against market expectations for another interest rate cut in December.

The US central bank also said it would stop reducing the size of its balance sheet as soon as December, marking the end of its quantitative tightening program. This, in turn, should help limit deeper losses for the buck and the USD/CAD pair, warranting some caution for bearish traders. The focus will remain glued to the highly-anticipated meeting between US President Donald Trump and his Chinese counterpart, Xi Jinping, which should infuse volatility in the markets.

Economic Indicator

BoC Interest Rate Decision

The Bank of Canada (BoC) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoC believes inflation will be above target (hawkish), it will raise interest rates in order to bring it down. This is bullish for the CAD since higher interest rates attract greater inflows of foreign capital. Likewise, if the BoC sees inflation falling below target (dovish) it will lower interest rates in order to give the Canadian economy a boost in the hope inflation will rise back up. This is bearish for CAD since it detracts from foreign capital flowing into the country.

AUD/USD sticks to positive bias above 0.7100; lacks bullish conviction

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