USD/CAD Hits 1-Year High Amid Canadian Economic Struggles

The USD/CAD exchange rate has reached a one-year high, primarily due to the lackluster performance of the Canadian economy in the third quarter of 2023. Canada's GDP remained stagnant in Q3, falling short of the Bank of Canada's growth projection of +0.8%.

Several factors have contributed to this economic slowdown. Goods-producing industries, particularly agriculture, have been on a downward trend for five consecutive months due to drought conditions in Western Canada. This downturn was further exacerbated by disruptions from fires and strikes early in the quarter, a decline in retail sales, and a stall in the post-pandemic recovery of food and accommodation services.

The Canadian factory sales declined in September, primarily due to decreases in the primary metal, chemical, and transportation equipment subsectors. This situation reflects the broader economic challenges that Canada is facing.

The potential for the Canadian economy to fall into a recession is compounded by the impact of the federal carbon tax. Bank of Canada's Governor, Tiff Macklem, noted that removing the carbon tax could lead to a temporary decrease in Canadian inflation, reducing the rate from 3.8% to 3.2%. However, this effect would only last for a year. The carbon tax contributes to annual inflation and has resulted in higher fuel and grocery costs for Canadians.

Despite the current economic climate, Canada has experienced robust population growth, and many homeowners have yet to feel the impact of higher interest rates. In response to these challenges, CIBC forecasts that the Bank of Canada will transition from rate hikes to rate cuts next year. They believe that a rate reduction will stimulate economic activity and counterbalance the difficulties facing goods-producing sectors.

The U.S. dollar index has seen support but remains influenced by the possibility of another Federal Reserve rate hike, as data reflects the resilience of the U.S. economy. The Federal Reserve is beginning a two-day policy meeting, while emphasizing their intention to keep rates high.

U.S. labor costs increased notably in the third quarter, driven by robust wage growth, and house price inflation accelerated in August. While wage and benefit growth in the U.S. slowed slightly in Q3, it still exceeded inflation, improving purchasing power despite challenges in previous years.

U.S. consumer confidence has declined for the third consecutive month, primarily due to concerns about inflation, higher borrowing costs, and the political environment. The U.S. housing market is at risk of a recession as mortgage rates approach 8%.

U.S. Treasury yields have dipped slightly ahead of the Federal Reserve's policy meeting. Investors are closely monitoring key economic indicators, including the consumer confidence report for October, August's S&P/Case-Shiller home price index, and the upcoming October jobs report, as these factors offer insights into the state of the labor market and economic stability.

Concerns arise due to the government's significant deficits, even amid robust economic growth. Recent auctions, such as the $38 billion sale of 7-year notes and a $23 billion auction of 30-year bonds, are pivotal in understanding the United States' fiscal trajectory, especially against the backdrop of rising Treasury yields. Hence, it could lead to the USD/CAD trend continuing to fluctuate within its upward trajectory. The Canadian dollar's potential for strengthening will largely rely on the policy decisions made by the United States during this timeframe.

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

Resistance : 1.3889, 1.3895, 1.3904

Support : 1.3871, 1.3865, 1.3856

5H Outlook    

Source: Investing.com 

Buy/Long 1 If the support at the price range 1.3861 - 1.3871 is touched, but the support at 1.3871 cannot be broken, the TP may be set around 1.3895 and the SL around 1.3856, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3889 - 1.3899, TP may be set around 1.3919 and SL around 1.3866, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3889 - 1.3899 is touched, but the resistance 1.3889 cannot be broken, the TP may be set around 1.3871 and the SL around 1.3904, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3861 - 1.3871, TP may be set around 1.3850 and SL around 1.3894, or up to the risk appetite.       

Pivot Points Nov 01, 2023 04:10AM GMT

Sources: Investing 1, Investing 2