**USD/CAD Rally Appears to Stall as Rosenberg Research Flags Key Fundamentals**
*By Futunn News*
The recent rally in the US dollar against the Canadian dollar (USD/CAD) may have hit a temporary ceiling, according to David Rosenberg of Rosenberg Research. As financial markets continue to digest a shifting macroeconomic landscape, Rosenberg points to several fundamental factors that suggest the USD’s momentum may be losing traction. In this article, we provide a detailed overview of why the USD/CAD pair may be approaching a period of consolidation or even a reversal, based on a mixture of economic data, central bank policy shifts, and commodity market dynamics.
### Overview of the Rally
– The US dollar gained strength throughout the first half of 2024, driven largely by persistent inflationary pressures and the continued hawkish stance of the US Federal Reserve.
– In contrast, the Canadian dollar has lagged behind as Canada’s economic indicators weakened and the Bank of Canada shifted toward a more dovish posture.
– This divergence in monetary policy and economic performance led to a notable appreciation in USD/CAD, pushing the pair to near the 1.38 mark in May 2024.
However, recent analysis from Rosenberg Research suggests that this rally may not be sustainable over the longer term, with several red flags signaling that the pair could be poised for a correction.
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### Monetary Policy Divergence Has Peaked
One of the core reasons behind the USD’s strength over the Canadian dollar has been the contrast between the US Federal Reserve’s and the Bank of Canada’s approaches to interest rates. However, Rosenberg argues that this divergence may have already reached its peak.
– **Federal Reserve Position**:
– The Fed has kept interest rates elevated for an extended period as it attempts to bring inflation closer to its long-term target of 2 percent.
– Despite a resilient job market and sticky core inflation, signs of economic slowing in sectors like manufacturing and housing have prompted calls for a potential rate cut later in 2024.
– Markets now anticipate the Fed could initiate at least one rate cut before the end of the year, depending on forthcoming job and inflation reports.
– **Bank of Canada Outlook**:
– The Bank of Canada has already begun signaling a more aggressive policy pivot, reducing its overnight rate by 25 basis points in June 2024.
– While weaker GDP growth and modest inflation give the BoC more flexibility for easing, any signs of economic stabilization or a pickup in commodity prices like oil could limit further rate cuts.
– The narrowing gap between Canadian and US policy rates could diminish USD/CAD tailwinds.
### Canadian Economy Shows Signs of Stabilization
While Canada’s GDP growth cooled in late 2023 and early 2024, a mix of factors suggests the Canadian economy may not be as vulnerable as some investors believe.
– **Housing Recovery**: After falling sharply as interest rates rose, Canada’s housing market has recently shown signs of bottoming. New home sales and permits have stabilized, supported by high immigration and chronic supply shortages.
– **Labor Market Resilience**:
– Canada’s unemployment rate remains below historical averages despite some moderation in job creation.
– Wage growth has kept pace with inflation, supporting domestic consumption.
– **Retail Sales Bounce**:
– Although consumer spending slowed in past quarters, April and May 2024 retail numbers exceeded expectations, suggesting improving sentiment and disposable income.
These modest but positive developments could strengthen the Canadian dollar in the coming months, especially if global commodities begin to rally again.
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### Oil Prices Back in Focus
Given that Canada is a major net exporter of crude oil, the correlation between oil prices and the Canadian dollar remains strong. This connection could play a pivotal role in the future direction of USD/CAD.
– **Recent Oil Price Action**:
– After hitting lows around $72 USD per barrel in April 2024, crude oil has started to rebound, currently trading around $78
Read more on USD/CAD trading.