Photo by Michelle Spollen on Unsplash
 

The Bank of Canada meets for its September rate-setting meeting today and while no further policy adjustments are expected, traders will be keeping a close eye on the bank’s forward guidance. Recent data point to a deterioration of the domestic economy, creating room for the BOC to hold rates steady today. Indeed, some players sense that the BOC’s tightening campaign might well be over given expectations of a further slowdown.
 

Inflation Risks Remain

Despite a slowing economy, CPI was seen rising back up to 3.3% in July, meaning that hawkish risks are still very much alive. As such, if the bank does hold steady today it will need to do enough to signal that further hikes are still a possibility or risk an adverse market reaction such as we saw when the BOC first paused its tightening campaign in January.
 

Weakening CAD Data

Canadian GDP was seen contracting in Q2, well below the 1.5% growth the BOC was looking for.  Higher inflation and tighter financial conditions have clearly taken a toll, with household spending seen rising just 0.2% YoY in that same quarter.  As we’re seeing elsewhere, the BOC is caught between a slowing economy and stubbornly elevated inflation. If we see an unchanged decision today, CAD is likely to remain weaker against the USD near-term with a focus then switching to US data through the end of the week.
 

Technical Views

USDCAD

(Click on image to enlarge)

The retest of the 1.3501 level has seen the market turning firmly higher. Price is now testing the 1.3683 level which, if broken, opens the way for a run up to the 1.3839 level next, in line with bullish momentum studies readings. To the downside, 1.3501 remains key support. 

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