Canadian monetary policy put into action

The Bank of Canada became the first major central bank to temporarily suspend restrictive monetary policy on March 8. The interest rate was retained at 4.50% due to the slowing economy and the declining inflation rate, as well as to assess the impact of recent interest rate hikes. The BoC remains committed to deferring further interest rate increases if inflation continues to fall as expected.

On the other hand, the Bank of Canada recently expressed concern about inflation remaining above its 2% target, noting that service inflation is stickier than expected and suggesting that it may consider tightening monetary policy again, while earlier in January, inflation was expected to fall to 3% by mid-year and slow to 2% next year.

While core inflation, which excludes food and energy prices, increased 4.8% year-over-year, overall Canadian inflation slowed more than anticipated in February to a 13-month low. Annual headline inflation fell to 5.2% in February from 5.9% in January, which was below expectations of 5.4%.

In February, energy prices declined 0.6%, though housing prices rose steadily for the third month in a row.

As a result, most money markets expect the Bank of Canada to keep interest rates unchanged at its next meeting on April 12 and maybe cut rates later this year considering the turmoil in the banking sector, implying that raising interest rates too high may cause more economic instability than previously assumed.

However, despite the fact that the Bank of Canada temporarily stopped raising interest rates to give businesses and households a break, borrowing costs are expected to remain high for a long time, and most Canadians are turning to savings and spending more on necessities such as food, clothing, and shelter rather than luxuries. As household retail spending accounts for around 5% of Canada's GDP, such behavior could be an indication of a tough economy confronted with a record high interest rate hike in 15 years, resulting in the broader Canadian economy slowing quicker than projected.

According to analysts, the decrease in consumer spending may be a trend in other countries as well as many central banks around the world are preparing to halt aggressive interest rate hikes to combat inflation in the near future.

Last Thursday, the US dollar hit a seven-week low after the market anticipated that the Fed was close to ending the rate hike. By Thursday night, the Federal Reserve had raised interest rates by another 25 basis points while maintaining its year-end terminal rate prediction of 5.1%, with Powell ruling out a rate drop by the end of the year.

Although yields in Canada and the United States varied slightly, the Canadian economy is already weakening faster than other big economies. Therefore, it is projected that the Canadian dollar will tend to stabilize and to weaker than the US dollar throughout this period. This week's noteworthy Canadian economic data is January's core retail sales, which are scheduled to be released on Friday morning.

Data for Technical Analysis (5H) CFD USD/CAD

Resistance : 1.3730, 1.3738, 1.3751

Support : 1.3704, 1.3696, 1.3683              

5H Outlook

Source: Investing.com                                   

Buy/Long 1 If the support at the price range 1.3699 - 1.3704 is touched, but the support at 1.3704 cannot be broken, the TP may be set around 1.3735 and the SL around 1.3696, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3730 - 1.3735, TP may be set around 1.3745 and SL around 1.3702, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3730 - 1.3735 is touched, but the resistance 1.3730 cannot be broken, the TP may be set around 1.3701 and the SL around 1.3738, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3699 - 1.3704, TP may be set around 1.3690 and SL around 1.3732, or up to the risk appetite.       

Pivot Points Mar 24, 2023 02:38AM GMT

Sources: Investing 1, Investing 2