CAD strengthens amid improving economic outlook.

The Canadian dollar (CAD) has strengthened to its highest level in 4 weeks, as investors anticipate that the Bank of Canada (BOC) will raise interest rates again next month. This comes after the currency strengthened for the first time since January.

The Bank of Canada raised its policy interest rate by 25 basis points to 4.75% last Wednesday, marking the highest level in 22 years. This rate hike follows a pause in rate increases after three consecutive hikes, driven by concerns that inflation may exceed the 2% target, amid sustained economic growth.

The latest Consumer Price Index (CPI) data reveals that Canada's CPI increased by 4.4% in April, higher than the market's forecast of 4.1% and up from 4.3% in March. However, the Core CPI, which excludes volatile items, decreased from 4.3% in March to 4.1% in April, lower than the expected 4.4%.

Benjamin Reitzes, Rates and Macro Strategist at BMO Capital Markets, noted that "if data continues to firm over the next few weeks, another 25 basis point hike in July is possible."

Overall, the strengthening of the Canadian dollar reflects positive investor sentiment and confidence in Canada's economic prospects, supported by expectations of further interest rate increases by the Bank of Canada.

Supporting evidence for the rate hike includes a 2.5% increase in Canada's exports in April, reaching a record high. Additionally, GDP in the first quarter performed better than expected, with a growth rate of 0.8% compared to the forecasted 0.4%. Canada's merchandise trade surplus also increased to CAD 1.9 billion, up from a revised decrease of CAD 0.2 billion in March.

Furthermore, domestic consumer spending has shown significant strength, with several areas experiencing a strong rebound, such as the recovery in service demand, increased residential activity, and a tight labor market. These factors indicate that demand remains sustained and higher than anticipated.

According to Canadian Finance Minister, Chrystia Freeland, the economic recovery from the Ukraine crisis and the COVID-19 pandemic has led to higher prices, stimulating increased demand for goods and services. She also stated, "The Canadian economy has shown remarkable resilience in 2023."

These factors collectively contribute to the justification for the interest rate hike, reflecting the positive performance and flexibility of the Canadian economy.

Technical analysis data (5H)

Resistance: 1.3373, 1.3387, 1.3395

Support: 1.3351, 1.3343, 1.3328

Source: Investing.com

 

Pivot Points June 8, 2023 00:33 PM GMT+7