Canadian Dollar Surges on Inflation, US Dollar Uncertain

The Canadian dollar experienced an increase, reaching a six-week high against the US dollar, driven by rising expectations of additional interest rate hikes by the Bank of Canada. This surge followed the release of inflation data that exceeded expectations.

The Consumer Price Index (CPI) in Canada expanded by 0.4% in August, surpassing the anticipated 0.2%. The annual headline inflation also sharply rose to 4%, exceeding the estimated 3.8% and the previous 3.3%. Excluding volatile oil and food prices, the core CPI only saw a nominal increase of 0.1%, indicating subdued demand for non-durable goods and services.

The Bank of Canada acknowledged the recent volatility in headline inflation but emphasized that the underlying trend shown by core measures did not align with the goal of bringing inflation down to the 2% target.

One contributing factor to this inflation increase was the rally in crude oil prices, which had a significant impact on CPI across all provinces. However, Canada's plan to lower food prices through increased regulation may fail and could raise business costs without benefiting consumers, caution lawyers and economists.

The country's existing weak competition laws have allowed a few companies to dominate various sectors, from banking to groceries. Prime Minister Justin Trudeau pledged to amend the Competition Act to address this issue.

This change would give the Competition Bureau the authority to block deals increasing market concentration. Trudeau's move comes as Canadians grapple with a 25% increase in food prices since the start of the COVID-19 pandemic in 2020, while efforts to combat inflation by raising interest rates have driven up mortgage costs and worsened housing affordability.

Money markets responded to the inflation data by raising bets for a rate hike by the Bank of Canada in October. The possibility of an additional rate hike was seen as likely, with a 42% chance compared to the previous 23% before the inflation figures were released. This increase in the Canadian dollar's value was reflected in its exchange rate against the US dollar, with the Canadian dollar trading 0.6% higher at 1.34 to the greenback, reaching its strongest level since August 10.

Despite these speculations, some experts believed that the Bank of Canada might maintain its current stance on interest rates if the economy continued to show signs of sluggishness. The Bank of Canada was scheduled to make its next interest rate decision on October 26, following a recent decision to maintain rates at 5%.

Meanwhile, in the United States, the US Dollar Index (DXY) experienced a two-day losing streak as the Federal Reserve was expected to maintain interest rates during its September monetary policy meeting. Traders anticipated that the Fed would keep rates unchanged at 5.25%-5.50% for the time being.

The dollar's recent strength was attributed to resilient US growth, although its rally faced potential challenges from upcoming economic data and the Fed's interest rate decisions. As a result, the future trajectory of the US dollar may necessitate the introduction of fresh factors to generate added momentum for the currency.

Data for Technical Analysis (30 Min) CFD USD/CAD

Resistance : 1.3458, 1.3461, 1.3465

Support : 1.3458, 1.3461, 1.3465

30Min Outlook   

Source: Investing.com

Buy/Long 1 If the support at the price range 1.3445 - 1.3450 is touched, but the support at 1.3450 cannot be broken, the TP may be set around 1.3461 and the SL around 1.3441, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3458 - 1.3463, TP may be set around 1.3472 and SL around 1.3446, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3458 - 1.3463 is touched, but the resistance 1.3458 cannot be broken, the TP may be set around 1.3450 and the SL around 1.3467, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3445 - 1.3450, TP may be set around 1.3439 and SL around 1.3462, or up to the risk appetite.       

Pivot Points Sep 20, 2023 02:47AM GMT

Sources: Investing 1, Investing 2