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USD/CAD: Bank of Canada hawkish signals, oil market decline, loonie price trap

The Bank of Canada raised interest rates by 50 basis points following the results of the June meeting. The regulator implemented the most expected, basic scenario, so the very fact of increasing the rate by this amount did not have any significant impact on the USD/CAD pair. However, the rhetoric of the accompanying statement allowed the bears of the pair to approach the bottom of the 26th figure again. The BoC remained hawkish and announced further tightening of monetary policy.


Over the past two days, the USD/CAD pair has been fluctuating in the price range of 1.2600–1.2690, consistently starting from the boundaries of this corridor. Sellers cannot enter the area of the 25th figure, while buyers are not even able to test the resistance level of 1.2700 to qualify for the 27th price level. As a result, the loonie got stuck within the 90-point corridor. Even the hawkish results of the June meeting of the Canadian regulator did not help the USD/CAD bears: they attempted a breakthrough, but at the very base of the 26th figure, the downward momentum faded. Sellers were forced to retreat, ending the trading day at 1.2653.

The fact is that the announcement of the results of the June meeting of the Bank of Canada coincided with the recovery of the US currency throughout the market. The US dollar index returned to the area of the 102nd figure, against the background of the growth of the oil market, the strengthening of inflationary expectations, and, accordingly, the strengthening of hawkish expectations regarding the further actions of the Fed. Therefore, Canadian events faded into the background, and the loonie was forced to trade in the wake of the US currency.

Although the final communique of the BoC is indeed quite "militant" in nature. Members of the regulator assured market participants that interest rates will continue to rise, as "inflation is likely to move even higher in the near term before it starts to weaken." Note that according to the latest data, the annual inflation rate in Canada accelerated: the April consumer price index jumped to 6.8%. As for the core CPI, this indicator was at the level of 5.7% on an annualized basis (against the forecast of growth of 5.4%). The USD/CAD bears were also pleased with another inflationary indicator—Canada's Producer Price Index. This indicator rose by 0.8% against the forecast growth of 0.5%.

At the same time, the Canadian regulator actually ignored the report on Canada's GDP growth published the day before. Almost all components of the data came out in the "red zone," reflecting the slowdown in economic growth. In the first quarter, the country's economy grew by 0.8% compared to the previous three months (in the 4th quarter, the growth was 1.6%). On an annualized basis, Canadian GDP rose 3.1% after rising 6.6% in the previous quarter. In this case, the result was clearly disappointing: most economists surveyed expected the indicator to rise by 5.4%. Real GDP grew by 0.7% (on a monthly basis). Here, the indicator exceeded the forecast estimates (0.5%), but turned out to be weaker than the February result (0.9%).

As you can see, the report is, to put it mildly, controversial, but the members of the Canadian regulator did not dramatize the situation on this matter. The text of the accompanying statement said that growth in the second quarter "will be quite strong," given the resilient consumer spending, as well as expectations of stronger exports.



Taking into account the rhetoric of the BoC, the experts came to the conclusion that following the results of the July meeting, the regulator will also raise the interest rate by 50 basis points. The majority of economists polled by The Wall Street Journal expressed their confidence in this scenario. Some of them announced that in September, the central bank would also decide on a 50-point increase. This scenario is indirectly confirmed by the regulator itself: the text of the statement states that "the central bank is ready to act more decisively if necessary to achieve the goal of lowering inflation to a two percent target."

On the one hand, the Bank of Canada has created all the prerequisites for the USD/CAD bears to organize a large-scale offensive—with a break through the resistance level of 1.2600 and subsequent consolidation in the area of the 25th figure. But after another unsuccessful attempt, the pair got stuck in the middle of the 1.2600–1.2690 range. This is due to the indecision of both buyers and sellers of the pair.

In particular, yesterday's growth in the oil market was stopped by the news that OPEC+ members can compensate for the decline in oil production from Russia (Saudi Arabia can play a key role here). Therefore, despite the introduction of a partial oil embargo against the Russian Federation, the cost of a barrel of Brent crude has dropped to $113 today (after recent highs around $120).

The market mood has changed, so USD/CAD traders are in no hurry to open large positions—neither towards the downside nor towards the upside. In my opinion, the pair will fluctuate within the range of 1.2600–1.2690 over the next day (before the publication of Nonfarm Payrolls on Friday). Under the current conditions, you can either take a wait-and-see position (again before the release of Nonfarm Payrolls), or open buy/sell orders when approaching one of the boundaries of the above price corridor.

Trading analysis offered by RobotFX and Flex EA.