Canada's Economic Challenges, US Dollar Stable Ahead of Inflation Data

The economic landscape in Canada has been marked by a downturn in its services sector, as reflected in the latest data from S&P Global Canada services PMI. In March, the sector experienced further contraction due to factors such as increased prices and elevated borrowing costs, which have dampened customer demand.

The headline business activity index fell slightly in March, indicating a continued contraction in the sector for the tenth consecutive month, the longest such period in three years. Sales have declined for an eighth successive month, with reduced consumer confidence and high prices cited as contributing factors. The input prices index rose slightly in March, driven by higher wages, prompting service providers to pass on increased costs by raising sales prices.

Investors anticipate that the Bank of Canada will maintain its benchmark interest rate at a 22-year high of 5% during its upcoming policy decision in April. However, there is speculation that the bank may initiate an easing cycle starting in June or July, with the possibility of rate cuts expected to support a stronger economic climate in the coming year. Despite concerns about the current state of the services sector, the future activity index remains relatively high, suggesting cautious optimism among businesses regarding future growth prospects.

In addition to the challenges facing the services sector, the real estate market in the Greater Toronto Area (GTA) has also experienced a slowdown in March. Home sales declined for a second consecutive month, while prices continued to rise, posing challenges to a housing market recovery. Nonetheless, there was an annual increase in sales and new listings in the first quarter, indicating some resilience in the market.

Looking ahead, Canadian homebuilders are expected to reduce new construction for the third consecutive year in 2024 due to elevated borrowing costs, according to forecasts from Canada's national housing agency. Housing starts are projected to decrease this year, with a gradual recovery expected in subsequent years but remaining below peak levels reached in 2021. The housing shortage in Canada has prompted the government to launch initiatives such as the Canada Housing Infrastructure Fund to accelerate housing construction and upgrading.

Meanwhile, in the United States, on Wednesday, the dollar remained relatively stable as investors exercised caution in anticipation of upcoming U.S. inflation data (CPI) for March scheduled for release today. Expectations are for a 0.3% gain in the headline CPI and core CPI, following a 0.4% rise in February. Geopolitical tensions may increase demand for safe-haven assets like the dollar, as hopes for a Gaza ceasefire dwindled after Hamas rejected mediation proposals.

In the U.S., small-business confidence hit an 11-year low in March, with inflation concerns prominent. The National Federation of Independent Business reported decreased optimism, citing inflation as a top worry among owners.

Despite a strong job market, the latest survey of consumer expectations from the Federal Reserve Bank of New York indicates mixed views on inflation among Americans. While expectations for inflation over the next year remained unchanged at 3%, there are concerns about rising prices across various goods and services. Additionally, worries about missing debt payments have increased, particularly among lower-income households and middle-aged respondents.

Futures traders reduced rate cut expectations to the lowest since October, at around 60 basis points for the year, based on LSEG data. However, U.S. interest rate futures now show a 60% chance of the first cut in June, up from 51%, with a 40% chance of rates remaining unchanged. Hence, it is anticipated that the USD/CAD currency pair will maintain its stability within the existing context, given the similarity in returns between the two countries.

Data for Technical Analysis (1H) CFD USD/CAD

Resistance : 1.3570, 1.3572, 1.3576

Support : 1.3564, 1.3562, 1.3558

1H Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.3554 - 1.3564 is touched, but the support at 1.3564 cannot be broken, the TP may be set around 1.3570 and the SL around 1.3549, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3570 - 1.3580, TP may be set around 1.3600 and SL around 1.3559, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3570 - 1.3580 is touched, but the resistance 1.3570 cannot be broken, the TP may be set around 1.3561 and the SL around 1.3585, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3554 - 1.3564, TP may be set around 1.3540 and SL around 1.3575, or up to the risk appetite.       

Pivot Points Apr 10, 2024 02:49AM GMT