The loonie's fate is in the hands of the Canadian central bank. There are increasing speculations that the Bank of Canada will slow the pace of its rate hike again at the next meeting, raising it only by 25 points. Such rumors of a dovish nature are not absolute, but very persistent. In particular, last week currency strategists of RBC Capital Markets voiced a corresponding forecast. Moreover, in their opinion, the central bank as a whole is already close to the end of the cycle of interest rate hikes.
Judging by the pair's dynamics, the loonie is not in a hurry to draw conclusions, although such conversations have stopped the downtrend. Thus, in the first half of November, the bears tried to stay under the support level of 1.3260 (at that time it corresponded to the bottom lines of the Bollinger Bands indicator on the D1 and H4 time frames) several times. But after the bears impulsively broke through this limit, they got stuck near the level of 1.3230. The downward momentum faded, the price returned to its previous positions. After several unsuccessful attempts, the USD/CAD bears intercepted the initiative, but the controversial FOMC minutes did not allow them to launch a bullish counter-offensive. The pair finished the previous trading week at 1.3376.
This week the pair's traders will focus not only on Friday's reports (the U.S. and Canada will release key labor market data on December 2). The main "test" for the loonie will be the Canadian economic growth data which will be released on Tuesday (November 29). According to preliminary projections, Canada's GDP will only grow by 1.5%. Even if the figure comes out at the forecasted level, we could talk about a significant slowdown in the growth rate of the economy (3.1% growth in the first quarter, and 3.3% in the second quarter). If the release is in the red zone, the Canadian dollar will be under considerable pressure. Because in this case the dovish rumors about further actions of the Bank of Canada will only strengthen.
The official comments of the central bank's representatives so far have been contradictory. For example, Bank of Canada Governor Tiff Macklem has recently sounded very vague about how Canadians should be prepared for further rate hikes "in addition to the six that have already occurred this year". He lamented the tight labor market ("demand exceeds supply") and suggested that economic growth will be "minimal" over the next few quarters, until about the middle of next year. But he did not talk about the expected pace of rate hikes or the final point in the current cycle.
At the same time as the senior deputy governor of the Bank of Canada Carolyn Rogers reported that the end of the cycle of tightening of monetary policy is "already close". She added, however, that "in the near future" there is still a need to raise interest rates to reduce inflation.
I would like to point out that the Bank of Canada disappointed the USD/CAD bears at its last meeting in October: contrary to expectations of most experts, it did not raise the interest rate by 75 points, limiting itself to a 50-point hike. According to Macklem, the decision to slow the pace of policy tightening was made "amid growing fears of a deepening global economic downturn". He added that the central bank is trying to balance the risks of "under- and over-tightening".
Macklem said in passing that the central bank was "nearing the end of its rate-hike cycle". And although he immediately clarified that the process of raising the rate has not yet been completed, the message itself was perceived by the market accordingly.
Thus, this week's key releases (especially Canadian GDP growth) will decide the fate of the USD/CAD pair in the medium term, as the Bank of Canada will be guided by them on December 7. The slowdown in economic growth, the decline in the labor market amid the first signs of easing inflationary pressures in recent months will create an appropriate springboard for a further slowdown in the pace of monetary tightening by the central bank. These circumstances will also support the view that the Bank of Canada may be nearing the end of its current interest rate hike cycle. A 25-point rate hike at the December meeting would then be the "first swallow" announcing the unwinding of the hawkish course.
The U.S. Federal Reserve, for its part, remains hawkish despite a planned slowdown in the pace of rate hikes. Moreover, some Fed officials, most notably Fed Chairman Jerome Powell, allow the possibility that the upper limit of the current cycle could exceed the 5% level. In particular, not so long ago James Bullard spoke about an indicative target of 5.25%. At the same time, many members of the Committee are actively voicing the message that inflation is still high (despite the first signs of slowing growth), and therefore the Fed has "a lot of work to do".
All this suggests that the fundamental picture on the pair is gradually progressing in favor of the bullish scenario. If the major macroeconomic releases disappoint the loonie, the bulls may retest the nearest resistance level of 1.3450 (middle line of the Bollinger Bands indicator on the daily chart). Last week, the USD/CAD bulls already tried to take this price barrier by storm, but in vain. The next (main) resistance level is located at 1.3700 (the upper line of the Bollinger Bands on the same timeframe). However, it is too early to talk about reaching this target.