- An improvement in risk appetite on speculation of a Fed pivot weakened the US dollar.
- Worse-than-expected US economic data, specifically consumer confidence and housing data, are headwinds for the USD, strengthening the CAD.
- The Bank of Canada is expected to hike 75bps, but if it goes 50bps, the USDCAD may rally towards 1.3700.
- If USDCAD is neutral to the upside, but a break below 1.3600 will send the pair towards 1.3500.
The U.S. dollar is recovering a bit as the Asia-Pacific session opens on Wednesday after a trading session on Tuesday marked by rising risk appetite, with U.S. stocks registering gains on investor speculation that a Federal Reserve pivot is imminent while the U.S. dollar weakens. Conversely, the Canadian dollar was supported by expectations that the Bank of Canada (BoC) will raise interest rates by 75 basis points in its monetary policy decision. Thus, USD/CAD is trading at 1.3626, which is 0.16% above its opening price.
The US dollar is affected by risk-on sentiment, weaker consumer confidence and falling US home prices
In addition to US corporate earnings beating reports from the previous quarter, the US dollar was hit by weaker-than-expected economic data. The Conference Board (CB) reported on October consumer confidence, which fell due to growing concerns about inflation and a possible recession in the United States. The index fell to 102.5 from 107.8 in September, missing analysts’ forecasts of 106.5. USDCAD dipped from around 1.3700 to the 1.3620 area on the report as consumer confidence data added to the weaker US housing market data revealed earlier.
The United States calendar revealed that the US housing market continues to cool, weighed down by the Federal Reserve’s monetary policy stance. The S&P CoreLogic Case-Shiller index said prices in 20 major U.S. cities fell 1.3% month-over-month in August, the most since March 2009. At the same time, the Federal Housing Finance Agency (FHFA) in a separate report listed the home. prices rose 11.9% year-on-year in August, although they were followed by a 13.9% increase in July.
US Treasury yields fell, weakening the USD and strengthening the CAD
Meanwhile, U.S. bonds rallied, weighing on U.S. Treasury yields. The U.S. benchmark 10-year Treasury yield fell fourteen basis points from around 4.22% to 4.08%, weakening the greenback, as shown by the U.S. Dollar Index (DXY). The DXY lost nearly 1% on Tuesday, capitalized on by buyers in the Canadian dollar, which extended USDCAD’s losses to a daily low of 1.3601.
The Bank of Canada is expected to raise the Bank Rate by 75 basis points
In addition, the upcoming Bank of Canada (BoC) monetary policy meeting supported the CAD. As the latest BoC Consumer Survey showed business sentiment softened and price pressures eased, inflation expectations remained high, the survey showed. Also, Canada’s consumer price index (CPI) for September, a measure of inflation, rose 6.9% year-on-year, above estimates of 6.8%, though lower than August’s 7.0%, justifying the need for more interest rate hikes from the BoC.
On Wednesday, Canada’s economic paper will include the Bank of Canada’s monetary policy decision. On the US front, further housing data with September building permits and new home sales would add further downward pressure to the USD, which could be positive for the CAD.
USDCAD Price Prediction
The USDCAD is biased neutral to the upside as shown by the daily chart. On Tuesday, the Loonie strengthened against the US dollar as the exchange rate dipped below its 20-day exponential moving average (EMA) and hit a fresh three-week low of 1.3600. While the dollar recovered a bit, it remains vulnerable to selling pressure as the Relative Strength Index (RSI) at 50.43 extended its decline and headed into bearish territory. This could mean sellers are gathering enough momentum to push USDCAD towards 1.3500.
Key support levels lie at 1.3600, followed by the daily low of October 6 at 1.3564, ahead of 1.3500. On the downside, USDCAD’s first resistance would be 1.3700, followed by the 20-day EMA at 1.3715 and the October 25 high at 1.3747.
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