**USD/CAD Breakout Gathers Momentum Following Bank of Canada Rate Decision**
*Adapted and expanded from an original article by James Stanley on Seeking Alpha*
The USD/CAD currency pair has started to widen its range, with technical indicators suggesting further upside potential. This momentum follows the Bank of Canada (BoC) holding its benchmark interest rate steady, while market dynamics on both sides of the border are contributing to the bullish pressure on the pair.
Let’s take a deeper look into the current macroeconomic backdrop, the BoC’s policy stance, and the technical structure that may be reinforcing the upside trajectory of USD/CAD. This analysis will combine insights from the original work by James Stanley of DailyFX and additional market research.
## Bank of Canada: Holding the Rate, Encouraging Speculation
The Bank of Canada recently decided to maintain its key overnight interest rate at 5.0%. This is the sixth consecutive hold since the BoC last raised its rate in July 2023, which marked the end of a tightening cycle that had aimed to rein in inflation. The current hold suggests the BoC is treading cautiously amid growing concerns about a slowing economy and a weakening housing sector.
### Key Takeaways from BoC’s Decision
– The central bank acknowledged that core inflation remains sticky but has shown signs of slowing.
– Policymakers are keeping a close eye on employment and consumer spending, both of which have shown signs of cooling.
– Markets are now beginning to price in potential interest rate cuts starting mid-2024, with swaps pricing suggesting multiple rate cuts by the end of the year.
This accommodative outlook, or at least the perception of a dovish tilt, is weakening the Canadian dollar against its U.S. counterpart.
## Canadian Economic Landscape Slows
The BoC’s caution is rooted in economic underperformance. Canadian GDP contracted in the third quarter of 2023, with continued stagnation expected into early 2024. Unemployment numbers have also crept higher, reflecting a slowdown in economic activity.
According to Statistics Canada:
– Canada’s real GDP grew just 0.3% in the fourth quarter of 2023, falling below consensus expectations.
– The unemployment rate rose to 6.1% in March 2024, compared to a 5.0% rate a year earlier.
– Mortgage stress and consumer debt levels remained elevated due to past rate hikes, putting pressure on household consumption.
With such headwinds, investors are increasingly betting that the BoC will cut rates sooner rather than later, adding to pressure on CAD.
## U.S. Economy Remains Resilient
On the other side of the equation, the U.S. economy has remained comparatively strong. Inflation in the U.S. has cooled significantly, but economic growth has moderated rather than contracted. The Federal Reserve has maintained a cautious policy stance, signaling it may begin easing later in the year, but without confirming a timeline.
Key U.S. data points include:
– Headline inflation dropped to 3.1% year-over-year in March 2024, down from over 9% in June 2022.
– Core inflation remains sticky at 3.5%, higher than the Fed’s 2% target, reducing the urgency to cut rates aggressively.
– The U.S. labor market remains robust, with unemployment sitting at 3.9% as of March 2024.
This economic divergence has supported the U.S. dollar overall, making it more attractive relative to the Canadian dollar.
## Crude Oil Prices Impact the Loonie
As one of the world’s largest oil exporters, Canada’s currency is highly correlated with crude oil prices. While oil prices climbed modestly in early 2024, they have failed to break higher due to concerns over global demand, especially in China.
– WTI crude futures have hovered around $78–82 per barrel for several weeks, lacking bullish momentum.
– Weak Chinese economic data and reduced global manufacturing
Read more on USD/CAD trading.