BoC Keeps Rates Steady Amid Inflation and Growth Concerns

The Bank of Canada (BoC) recently announced its decision to keep its key overnight interest rate steady at 5%. This decision comes in the wake of a period of weaker economic growth in Canada. The BoC had previously raised interest rates by a quarter point in both June and July in an attempt to combat persistently high inflation, which had exceeded the bank's 2% target for 27 consecutive months.

Despite the recent economic slowdown, inflation remained a concern, with July seeing an inflation rate of 3.3%, and core inflation measures hovering around 3.5%. The BoC indicated that it was ready to raise interest rates again if inflationary pressures persisted, although many analysts believed that further rate increases were unlikely in the immediate future.

Canada's economy faced a setback when its gross domestic product unexpectedly contracted by an annualized 0.2% in the second quarter, raising concerns about a potential recession.

However, this contraction coincided with the central bank's efforts to curb inflation by raising interest rates. The BoC acknowledged that higher interest rates, now at a 22-year high, were putting pressure on a broader range of borrowers and contributing to the current period of weaker economic growth. The central bank argued that this slowdown was necessary to alleviate inflationary pressures.

The head of Canada's banking regulator, Peter Routledge, acknowledged that the mortgage stress test in Canada was imperfect, particularly as homeowners with variable-rate mortgages struggled to meet their loan payments following the central bank's series of interest rate hikes. The stress test rules, amended in 2021, required borrowers to demonstrate their ability to handle mortgage repayments at a rate 200 basis points higher than their contracted rate.

Routledge noted that the risk environment for Canada's financial system was increasing, prompting the Office of the Superintendent of Financial Institutions (OSFI) to work on a new supervisory framework, which would take effect in 2024. This revision represented the first in-depth overhaul in 25 years.

Despite the challenges posed by high borrowing costs and inflation, some positive economic indicators emerged. Canadian economic activity rebounded in August after a contraction in the previous month, as reported by the Ivey Purchasing Managers Index (PMI). Additionally, Canada recorded a smaller-than-expected trade deficit in July, with exports, particularly in canola, aircraft, and transportation equipment, contributing to the positive outcome.

However, concerns remained about the Canadian dollar's performance, as China's economic slowdown and widening yield gaps between U.S. and Canadian bonds led analysts to revise their near-term forecasts. Nevertheless, they expected the currency to strengthen over the long term.

In the United States, the U.S. dollar remained strong near a six-month peak, supported by robust service sector activity and rising prices, fueling concerns of persistent inflation. Unemployment data indicated a healthy labor market, with the Federal Reserve maintaining a hawkish outlook.

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

Resistance : 1.3685, 1.3691, 1.3700

Support : 1.3667, 1.3661, 1.3652  

5H Outlook

Source: Investing.com

Buy/Long 1 If the support at the price range 1.3657 - 1.3667 is touched, but the support at 1.3667 cannot be broken, the TP may be set around 1.3686 and the SL around 1.3652, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3685 - 1.3695, TP may be set around 1.3705 and SL around 1.3662, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3685 - 1.3695 is touched, but the resistance 1.3685 cannot be broken, the TP may be set around 1.3662 and the SL around 1.3700, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3657 - 1.3667, TP may be set around 1.3640 and SL around 1.3690, or up to the risk appetite.       

Pivot Points Sep 08, 2023 07:00AM GMT

Sources: Investing 1, Investing 2