Forex Opinion & Analysis

USD/CAD: Loonie Under Pressure Following 50bp Rate Cut by BoC

The Canadian dollar is in negative territory on Wednesday. In the North American session, USD/CAD is trading at 1.3844 at the time of writing, up 0.20%. The Canadian dollar has posted only three winning days in October and is close to a 10-week low.

BoC flexes muscles, cuts rates by 50 bps

The Bank of Canada has been among the global leaders in the new era of rate cutting and lowered rates for the fourth consecutive meeting earlier today. This brings interest the benchmark rate to 3.75%, 125 basis points lower than when the BoC started cutting rates in June.

The markets were not surprised by the oversized 50bp cut, as Canada’s economy remains weak and inflation has been contained. Inflation dropped to 1.6% y/y in September after hitting the BoC’s 2% target in August. With inflation running at a three-year low, the BoC is expected to keep a close eye on the labor market, which has remained in decent shape.

The BoC would like to gradually cut rates by 25 bp increments but could be forced to deliver another jumbo cut if inflation falls more than expected or the job market shows a sharp deterioration. The BoC meets next on Dec. 11 and policymakers will have to again decide on whether to cut rates by 25 or 50 basis points.

The Federal Reserve has also been aggressive and started its rate-cutting cycle with a 50-bp cut in September. Inflation has been on a downtrend and eased to 2.4% in September, down from 2.5% a month earlier. Employment has become the number one priority and softer-than-expected job reports were a key reason why the Fed opted for an oversized cut in September.

Fed members have signaled that more cuts are coming before year’s end but expect these to be the standard 25-bp size, barring a serious downswing in the US economy.

USD/CAD Technical

  • USD/CAD is testing resistance at 1.3845. Above, there is resistance at 1.3888
  • 1.3796 and 1.3753 are the next support levels

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