Canada’s Inflation Hits 40-Month Low, Paving Way for Potential Rate Cuts

Canada's annual inflation rate dropped to a 40-month low of 2.5% in July, aligning with predictions, and core inflation metrics also eased. This decline keeps the Bank of Canada on track to potentially lower interest rates again in September. Money markets are anticipating a 25 basis point rate cut in September, with a total of three cuts expected by year-end, potentially bringing the benchmark rate to 3.75%.

The central bank has already reduced its policy rate at the last two meetings, moving it from 5% to 4.5%. This recent shift includes not just a focus on controlling inflation but also on stimulating economic growth. July's inflation, driven by lower prices for travel, vehicles, and electricity, brought the rate closer to the Bank's 2% target, the lowest since March 2021.

In July, Canada lost 2,800 jobs, with full-time gains offset by part-time losses, and the unemployment rate remained at a 30-month high of 6.4%. Despite this, the labor market is expected to have a minimal impact on the trajectory of rate cuts. The Bank of Canada noted slower economic growth compared to population growth, leading to economic slack and rising unemployment.

The Ivey Purchasing Managers Index (PMI) showed that Canadian economic activity grew at a slower pace in July, with the seasonally adjusted index falling from 62.5 in June to 57.6.

Meanwhile, a potential stoppage of freight railway operations in Canada could severely disrupt North America's agricultural supply chain. Without last-minute labor agreements, major rail operators plan to halt services, affecting shipments of key commodities like wheat and fertilizer, which could have significant repercussions for both Canadian and U.S. economies.

The U.S. dollar recently dropped to a seven-month low as traders anticipate Federal Reserve Chair Jerome Powell's upcoming comments, which may provide insights into the pace of monetary easing.

A decline in U.S. Treasury yields has contributed to the dollar's weakness. Earlier, a disappointing payroll report led traders to speculate that the Fed might reduce interest rates by 50 basis points in September. However, recent stronger economic data has shifted expectations towards a smaller, 25-basis-point cut. Powell's address is expected to clarify the Fed's plans, with many anticipating a gradual easing of credit conditions.

The U.S. unemployment rate has risen from 3.7% in January 2023 to 4.3% in July 2024, leading to discussions within the Fed about the timing and scale of potential rate cuts. While some officials, including Minneapolis Fed President Neel Kashkari and San Francisco Fed President Mary Daly, are open to rate cuts, others like Federal Reserve Governor Michelle Bowman urge caution due to ongoing inflation risks.

Investors are watching Powell's upcoming speech closely. Market analysts are divided on whether the Fed will reduce rates by 50-75 basis points this year or more. Additionally, political factors, such as the upcoming U.S. presidential election, are influencing the dollar's outlook. This could lead to the Canadian dollar fluctuating within a broad range and potentially weakening further, influenced by the disparity in returns between the two countries and the economic and political uncertainty in the United States.

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

Resistance : 1.3620, 1.3622, 1.3624

Support : 1.3616, 1.3614, 1.3612

1H Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.3611 - 1.3616 is touched, but the support at 1.3616 cannot be broken, the TP may be set around 1.3621 and the SL around 1.3609, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3620 - 1.3625, TP may be set around 1.3630 and SL around 1.3614, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3620 - 1.3625 is touched, but the resistance 1.3620 cannot be broken, the TP may be set around 1.3615 and the SL around 1.3627, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3611 - 1.3616, TP may be set around 1.3606 and SL around 1.3622, or up to the risk appetite.       

Pivot Points Aug 21, 2024 03:01AM GMT