The recent bounce-back in the US Dollar(USD) versus Canadian dollar(CAD) exchange rate surprised folks. The USD/CAD had dropped to its lowest point in over 4 months late last week. But then out of the blue, it rebounded back above the 1.3260 level early this week. What happened to cause this turnaround? The shifting expectations about what the US Federal Reserve will do with interest rates in 2024 seems to be the major factor.
Investors increasingly bet that the FED will start cutting rates faster next year as inflation cools off quicker than expected. The latest inflation numbers show it easing back more sharply than analysts thought. And when inflation declines, central banks often lower rates to boost the economy. So traders now reckon the FED will need to start rate cuts sooner, strengthening the US dollar. A lot can change in a year, but that’s the driver behind the greenback bouncing back versus the loonie.
Canadian Economic Growth Hits a Standstill as US Inflation Shows Further Decline
It’s a broad measure of the overall size and growth of the economy. But lately, Canada’s GDP numbers have been showing some worrying stagnation. For 4 straight months now, including the newest October figures, the GDP has failed to show any real expansion.
In October, the GDP didn’t budge at all – it came in at a flat 0.0% growth. That continued what we saw in September, which was first thought to be a small 0.1% gain but later revised to be zero gain. So the economy hasn’t been contracting sharply, but it has puttered along without any real forward momentum for months now.
For investors, this stagnation in the GDP often signals an economy that is sputtering and constrains their appetite. And that spells trouble for the Canadian dollar attracting foreign capital when economic health looks questionable. The loonie faces headwinds if Canada can’t get things kicked back into higher gear soon.
A key inflation gauge, the PCE Price Index, just came in lower than many experts had predicted. This could mean inflation is cooling off faster than expected, affecting market outlooks.
Specifically, the November reading for Core PCE, which strips out volatile food and energy prices, landed at 3.2%. That’s a tad under the 3.3% economists had forecasted. It’s also down from an upwardly revised 3.4% in October. Essentially, the core inflation rate is declining more quickly than anticipated.
This matters because the PCE index gives insight into broader price trends across the whole economy. So the cooling figures hint that the intense inflationary pressures of the past year may be loosening their grip faster than forecast models suggested.
Naturally, this data has Wall Street speculating about how the Federal Reserve might react. The FED pays close attention to PCE readings when deciding on interest rate moves.
This shift in market expectations reflects the ever-changing landscape of the US economy and the complexities involved in predicting its course. It’s a situation that keenly illustrates how interconnected various economic indicators are, and how they can collectively influence policy decisions and market sentiments.
Because of these inflation figures coming in lower than predicted, there’s been a shift in what investors think the Federal Reserve might do next. More folks are betting the FED may opt for steeper interest rate hikes in 2024 since inflation appears to be cooling.
The thinking is that with inflation easing back faster than expected, the FED may have more room to rapidly raise rates without it completely slamming the brakes on economic growth. Usually, rate hikes are used to control inflation, but they can also slow down economic activity as a side effect. It’s a tricky balancing act for the FED.
So with inflation looking a bit more under control, the FED may be able to afford to be more aggressive on rate increases without worrying as much about causing a recession. At least, that’s the prevailing view building on Wall Street.
It just shows how connected everything is in the economy. When one key metric, like inflation, changes direction quicker than anticipated, it starts shifting all the predictions about where things are headed. That then impacts market psychology on what the FED might do next. It’s a complex chain reaction.
USD/CAD Technical Outlook
The USD/CAD currency pair experienced a notable rally late last Friday, moving it back into a more balanced position for the day. This upward movement saw the pair inching closer to the 1.3300 mark, a change driven by increased market volatility as the week drew to a close.
Despite this late surge, the pair still ended the week on a lower note. From Monday’s opening, it was down by about 0.8%, and when compared to its recent peak – the swing high of 1.3620 – the decline was even more pronounced at 2.5%. This suggests that while the pair showed some resilience late in the week, it had generally been a period of downward pressure.
Looking at the intraday dynamics, there’s still a considerable distance before the USD/CAD can truly begin to challenge any significant upward momentum. The 200-hour Simple Moving Average (SMA) near 1.3400 is a key level to watch. Overcoming this barrier could signal a stronger topside push. However, with technical indicators suggesting that the pair is oversold, timing any near-term recoveries could be challenging. These conditions indicate that the pair has been sold excessively, potentially making it ripe for a rebound and difficult to predict exactly when that rebound might occur.
