USD/CAD Little Changed after the BoC Rate Hold, Awaiting US NFPs

USD/CAD Analysis

The Bank of Canada kept rates at 5% for third straight meeting on Wednesday and softened its language, by removing the previous mention of being "concerned that progress towards price stability is slow and inflationary risks have increased". The Canadian economy contracted by 1.1% in Q3, while unemployment has risen to the highest levels in nearly two years. Officials believe that the economic slowdown is "reducing inflationary pressures". After accelerating in July and August, the Consumer Price Index moderated again, coming in at 3.1% y/y in October. ^[1]

Despite acknowledging a relief in price pressures, policymakers are "still concerned about risks to the outlook for inflation" and kept more tightening in play, warning of their readiness to "raise the policy rate further" if needed.

USD/CAD rebounds this week and the BoC decision did not to quash it, given the less grim view on inflation. It tries to reclaim out the EMA200 (1.3650) and pause the bearish bias, but does not inspire confidence for new 2023 highs towards 1.3978. The upside is unfriendly though and the daily Ichimoku Cloud could contain the recovery, while the BoC kept more hikes on the table. Below the EMA200, USD/CAD is risk of renewed pressures that could threaten 1.3378.

The pair comes from its first loosing month since July, due to a dovish shift in market expectations around the Fed, with its latest decision due next week. Given soft inflation data, markets believe that the central bank is done hiking and price in rate cuts to start in the first quarter of 2024. Despite appearing overoptimistic, these expectations can continue to weigh on the pair. This week's employment figures offered more signs that the labor market conditions are easing and investors now turn to Friday's NFPs, which will likely determine the next leg of the move.