- The US economy remains robust with strong GDP and personal consumption expectations.
- The Bank of Canada is expected to cut interest rates again by 50 bps in December due to concerns about economic growth.
- US data might move the pair this week.
The USD/CAD pair moved higher on Monday as positive sentiment toward the US Dollar prevailed. The pair rose to a high above 1.3900, which was the highest level since November 11. The strength of the US Dollar is being supported by the expectations that the Federal Reserve (Fed) might not opt into aggressive easing. Meanwhile, the Bank of Canada (BOC) is expected to cut interest rates again in December due to concerns about economic growth.
The Canadian Dollar remains vulnerable due to expectations that the BoC will maintain its aggressive policy-easing stance at its upcoming December meeting. This comes in the wake of the BoC's recent 50-basis-point (bps) rate cut, its fourth consecutive reduction but the largest in size.
Daily digest market movers: Canadian Dollar recedes as US economic resilience pushes the USD higher
- The US economy is performing well. A Q3 GDP growth forecast of 3.0% SAAR matches Q2, and personal consumption at 3.2% SAAR surpasses Q2's 2.8% according to the GDPNow tracker.
- The Atlanta Fed’s GDPNow model predicts a higher Q3 growth of 3.3% SAAR, with the final update expected on Tuesday and Q4's forecast coming Thursday.
- The New York Fed’s Nowcast model estimates Q3 growth at 2.9% SAAR and Q4 at 2.5% SAAR, with its Q4 forecast to be updated on Friday and Q1 2025 forecast coming in late November.
- Consensus anticipates a rise in ISM Manufacturing PMI to 47.6 in October, supported by the recent increase in S&P Global US Manufacturing PMI to a two-month high of 47.8.
- In addition, Friday’s labor market data will be closely watched, including a Nonfarm Payroll and Unemployment reading.
- Meanwhile, markets continue to bet on two Federal Reserve cuts by the end of 2024.
- BoC cut interest rates by 50 basis points to 3.75% last Wednesday, larger than the usual 25 bps.
- Economists predict another 50 bps cut from the BoC in December due to downside risks to Canadian economic growth.
USD/CAD technical outlook: Bullish momentum remains, RSI and MACD flash overbought signals
The Relative Strength Index (RSI) for the currently stands at 74, indicating the pair is in overbought territory. The RSI is also showing a mildly rising slope, suggesting that buying pressure is rising.
The Moving Average Convergence Divergence (MACD) is also showing a bullish outlook with the histogram rising and green. This suggests that buying pressure is building and that the overall outlook for the pair remains positive. However, the overbought nature of these signals opens the door for a correction. The USD/CAD should find support between the 1.3800 and 1.3900 levels before the next bullish run.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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