Bank of Canada Signals Gradual Easing as Economic Uncertainty Looms

The Bank of Canada’s decision to cut its policy rate by 50 basis points to 3.25% on December 11 came after considerable internal debate. The decision reflected growing concerns over slower economic growth and a weaker outlook for inflation, with some members pointing to risks in the inflation forecast, while others noted signs of strength in housing and consumption that suggested caution. Governor Tiff Macklem emphasized that future rate cuts would be gradual, signaling a shift away from the previously more aggressive stance on monetary easing.

Canada's economic performance showed mixed signals. The economy exceeded expectations with 0.3% growth in October, driven by strength in oil and gas extraction and manufacturing. However, the preliminary estimate for November indicated a slight contraction of 0.1%, largely due to declines in sectors like mining and oil extraction, even though some service sectors saw growth. This pattern of volatility points to a challenging economic environment, with the economy likely falling short of the Bank of Canada's 2% growth projection for Q4.

In retail, October’s sales grew modestly by 0.6%, driven primarily by a surge in motor vehicle sales. However, excluding this volatile sector, retail growth was much weaker, at just 0.1%. November sales were expected to remain flat, indicating that consumer spending could be losing momentum entering the fourth quarter. This slowdown was partly attributed to the timing of a two-month sales tax holiday, which may have delayed purchases. Moreover, the retail data underscores broader trends in Canada's consumer spending, which, while a key driver of economic growth, has been stalling amid heightened inflationary pressures and shifting economic conditions.

The U.S. dollar reached a two-year high, continuing its dominance over other major currencies, supported by the Federal Reserve’s expected cautious approach to interest rates. Traders anticipate that inflation will remain above the Fed’s 2% target, prompting the central bank to keep rates high for longer. Additionally, President-elect Donald Trump’s policies—such as business deregulation, tax cuts, tariffs, and immigration controls—are expected to drive growth and price pressures, further strengthening the dollar. This, combined with geopolitical tensions and weaker global growth outside the U.S., has driven demand for the U.S. currency. The dollar’s resilience is reflected in U.S. Treasury yields and a 7% increase in the dollar index in 2024.

As the U.S. dollar maintains its strong position, experts predict its appeal will continue due to high yields, the U.S.'s economic exceptionalism, and its status as a safe-haven currency. This trend is further supported by global uncertainty, including the Russia-Ukraine war and rising tensions in the Middle East.

In the U.S., homelessness has surged by 18% over the past year, driven by factors such as high inflation, unaffordable housing, systemic issues, and natural disasters. The government has struggled to implement effective strategies to address this growing crisis.

In housing, the U.S. saw a 2.2% rise in contracts to purchase previously owned homes in November, marking the fourth consecutive month of growth. This increase reflects a stronger inventory of homes for sale, despite persistently high mortgage rates. This uptick in pending home sales suggests resilience in the housing market despite broader economic uncertainties.

On the trade front, the U.S. goods trade deficit widened more than expected in November, driven by a rise in imports, which outpaced the increase in exports. While exports showed positive growth, the trade deficit poses a risk to GDP growth, particularly as businesses may front-load imports due to anticipated tariffs under the new administration. The widening deficit clouds the outlook for trade as a contributor to economic growth in the fourth quarter, potentially reversing trade’s positive impact on GDP for the first time since late 2023.

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

Resistance : 1.4374, 1.4378, 1.4380

Support : 1.4394, 1.4390, 1.4388

1D Outlook

Source: TradingView 

Buy/Long 1 If the support at the price range 1.4384 - 1.4394 is touched, but the support at 1.4394 cannot be broken, the TP may be set around 1.4389 and the SL around 1.4379, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.4374 - 1.4384, TP may be set around 1.4400 and SL around 1.4375, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.4374 - 1.4384 is touched, but the resistance 1.4374 cannot be broken, the TP may be set around 1.4379 and the SL around 1.4389, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.4384 - 1.4394, TP may be set around 1.4369 and SL around 1.4393, or up to the risk appetite.       

Pivot Points Jan 2, 2025 07:09AM GMT