The October meeting of the Bank of Canada will be held tomorrow, which traders of the USD/CAD are looking forward to. According to the general forecast, the regulator should raise the interest rate by 25 basis points at this meeting – for the third time this year. However, last week the extremely weak data on inflation growth were published, after which they stopped talking about the October hike with one hundred percent likelihood. The doubts have affected the dynamics of the pair - the "loonie" has grown to the 31st figure, where it is now trying to gain a foothold. If tomorrow the Canadian regulator really disappoints traders, the price growth will become impulsive.
Let me remind you that the Bank of Canada began to tighten monetary policy cautiously in July last year. Then the rate was increased from 0.5% (at this level the rate was kept for almost two years) to 0.75%. Traders reacted quite violently-the USD/CAD pair fell from the 30th to the 24th level in a month, that is, by more than 600 points. In September 2017, the rate was again raised to one percent, in January this year to 1.25% and in July to 1.50%. The Canadian central bank is not going to stop: the rhetoric of the central bank's members has been quite tough lately, so market expectations regarding the October increase to 1.75% are quite justified. Just at the end of September, Stephen Poloz positively assessed the growth of the Canadian economy, hinting at a further increase in the rate.
Canada's GDP did show growth – according to the latest data, the indicator strengthened to 0.7%, mainly due to the manufacturing sector. As noted in the report by Statistics Canada, more than half (namely 13 of 20) industries strengthened their positions, and the industrial sector jumped immediately by 1.2%, setting a multi-month record.
The Canadian labor market also showed its strong side: the unemployment rate again "dived" at a 6 percent mark (5.9%), and the increase in the number of employees showed a positive trend. The average hourly wage has slightly decreased, but remained almost at the level of the previous months. Also, the positive picture is complemented by the figures of the trade balance, which for the first time since March 2017 came out of the negative area.
The external fundamental backdrop does not frighten USD/CAD traders by its uncertainty. Despite the fact that the trade war between the US and China is far from over, US-Canadian relations have improved somewhat. A month later (namely 29 November) Washington, Ottawa and Mexico city should sign an updated trade agreement – USMCA – which will replace NAFTA.
The Bank of Canada closely monitored the months-long process of negotiations, which were to be completed in the spring of this year. Now the Canadian central bank can put this issue on the back burner, as the parties have agreed on key positions that allow them to make a deal. This does not mean that relations between Canada and the United States have improved much: for example, Trump recently announced that import duties on steel and aluminum from Mexico and Canada will remain in effect. But in general, the parties were able to avoid the worst-case scenario, which involved, in particular, the introduction of duties on the import of cars and auto parts from Canada.
Now let's talk about the negative factors that can draw the attention of the members of the Canadian central bank. First of all, we are talking about inflation rates. On a monthly basis, the consumer price index fell to a negative area (-0.4%). In annual terms, there was also a decline to the May level, that is, to 2.2%. Core inflation fell to zero on a monthly basis and to one and a half percent on an annual basis. All without exception, the parameters came out in the "red zone", as experts expected either a less significant decline or a slight growth (depending on the indicator). The structure of the indicators suggests that the cost of transport services (transportation) prices for air travel, hotel and hotel accommodation, as well as tourist tours have decreased.
In addition to weak inflation, members of the Bank of Canada may express concern about the decline in the oil market. A barrel of Brent crude oil is now trading at $77.3 dollars, although last week the price was in the region of $80. This dynamics is explained by the position of Saudi Arabia – the minister of energy of this country said that Riyadh, firstly, will not reduce or limit the supply of "black gold" against the backdrop of the scandal surrounding the murder of a Saudi journalist. Secondly, Saudi Arabia will not only increase production to 11 million barrels per day, but will also consider the option of increasing this figure to 13 million barrels per day.
Such an ambiguous fundamental picture has baffled many traders and experts. The USD/CAD rate has gone up, as market participants fear the passive position of the Bank of Canada. Certainly, there is a certain risk of this scenario - but, in my opinion, the regulator will still justify the hopes of most traders and will increase the rate by 25 basis points tomorrow.
In July and January of this year (that is, when the central bank raised the rate), the situation was also ambiguous (for example, in July, Brent traded in the range of $73-75, and GDP growth was somewhat more modest) – but Stephen Poloz still tightened monetary policy, following the expected course. I believe that tomorrow he will also show determination in this matter and raise the rate to 1.75%. But he could really take a softer stance regarding further prospects. The fact is that the market is already discussing the possibility of another increase in the spring of next year – the head of the Bank of Canada here can cool the fervor of the "hawks", voicing cautious estimates.
Since the intrigue is preserved, the USD/CAD pair may soon continue to rise up to the resistance level of 1.3150 (the upper line of the Bollinger Bands on the daily chart). However, if the Bank of Canada has yet to show character, the "loonie" will collapse not only at the bottom of the 30th figure (Tenkan-sen line at D1), but also consolidate within the 29th figure.
The material has been provided by InstaForex Company - www.instaforex.com