It's Time to Take Notice of Canada!

Canada is STILL one of the few major economies not looking to cut rates.

Canada seems to be like that hockey team somewhere in the middle of the division, that no one really pays attention to.  But as the season progresses, they begin creeping up the standings, and all the sudden they are neck and neck tied with you!   It’s time to start taking notice of Canada.  As we talked about last month,  they are STILL one of the few major economies with a Central Bank that is not looking to cut rates.  The market still is pricing in roughly a 25% chance that they will cut rates at the October 30th meeting. However, at the beginning of the week, that number was near 50%!  Let’s look at some of the hurdles for the Bank of Canada:

-BOC Rate Decision: On Tuesday, the BOC held rates steady at 1.75%, and was less dovish than expected.  Two important pieces of data that were released before the meeting were retail sales and CPI, both of which came in better than expected.

-Employment data:  Wow! They employment data released today was better than expected (81,100 actual vs 18,900 expected), as opposed to the US NFP, which was worse than expected (130,000 actual vs 160,000 expected).  The two countries employment data was released at the same time today, and USD/CAD fell 80 pips.

-USMCA (The United States – Mexico- Canada Free Trade Agreement).  This is “NAFTA 2.0”, which much of the market seems to have forgotten, given all the trade war banter between the US and China.  The US Congress says they have the votes to pass the trade agreement, which could be as early as next week.  This would take uncertainty out of the market, which could help the Canadian economy.

-Canada’s Ivey PMI was released today as well.  As with most PMI data, a reading below 50 indicates expansion and a reading above 50 indicates expansion.  The estimate was 55.2.  The actual was 60.6. 

As we had discussed earlier in the week, USD/CAD is in the middle of a long-term triangle.  However, the pair finally broke out above short-term resistance on Monday and Tuesday and created a shooting star on each of those days, trading back within the trading range.  This price action created a divergent RSI as well, which is a signal that price can reverse.  Since the BOC rate announcement on Tues, USD/CAD has pulled all the way back to the 61.8% retracement level from the July 19th lows, to the September 3rd highs at 1.3173.   The pair traded in a 222 pip range this week to its lowest levels since July.  Next support level is at the rising trendline below, which is near 1.3100.  Below that, support comes in at the July 19th lows at 1.3020.  Resistance comes into play all the way up at yesterday’s highs at 1.3246.

Source: Tradingview,

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