Progress against inflation weakens the Canadian dollar

20 March 2024 79
Progress against inflation weakens the Canadian dollar

USDCAD showed strong bullish momentum during Tuesday's trading session. Although much of yesterday's gains were not sustained, Wednesday saw increased buying activity. Another test of the three-month high near 1.361 looks likely. Despite the sharp decline in early March, the medium-term trend for USDCAD is still upward.


On Tuesday, the Canadian dollar was weakened by February's inflation data. In contrast to the US, the rate of price increases in Canada continues to slow down. The headline inflation rate fell from 2.9% to 2.8%, compared to expectations of 3.1%. The core rate fell from 2.4% to 2.1%. This is the best result in 3 years. Currency market participants immediately began to adjust their positioning against the Canadian dollar.


Simon Harvey, head of analysis at Monex Canada, noted the apparent weakness in the national economy, which is manifesting itself in an increasing number of indicators. Royce Mendes of Desjardins Group pointed to the change in traders' expectations. The odds of the Bank of Canada cutting rates in June have risen from 50% to more than 75%, while the odds of such a move being made in April have risen from 18% to 28%.


Harvey believes the best option for the Canadian regulator is to start easing policy in April. He says officials should take into account the long time lag between a rate cut and an improving economy. If the Bank of Canada delays this decision, the country will fall into recession as early as the second half of 2024. It makes more sense for the regulator to prevent an economic crisis than to deal with its aftermath.


The current USDCAD rally could be accelerated by the announcement of the results of today's Fed meeting. US statistics clearly do not favor the dovish rhetoric of Jerome Powell and his colleagues. As a result, USDCAD may quickly return to the 1.361 level.


Consider the following trading strategy:

Buy USDCAD at the current price. Take profit - 1.361. Stop loss - 1.353.

Traders may also use a Trailing stop instead of a fixed Stop loss at their discretion

This content is for informational purposes only and is not intended to be investing advice.

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