The Canadian dollar, paired with the American currency, is once again strengthening its position. The downward dynamics of USD/CAD are primarily due to the weakening of the greenback, although the Canadian dollar has also shown character lately. Contradictory data on inflation growth in Canada, published on Tuesday, left more questions than answers, particularly regarding the further prospects of tightening monetary policy. The head of the Bank of Canada also voiced quite contradictory signals, allowing USD/CAD sellers to increase pressure on the pair.
The pair has updated a 2.5-week price low and is testing the support level at 1.3650 (the Tenkan-sen line on the weekly chart) as of writing. This is a key price barrier: USD/CAD bears have repeatedly tried to push it down since early October but in vain. Overcoming this level of support will open the way to the level of 1.3560, corresponding to the middle line of the Bollinger Bands indicator on the W1 timeframe. Given the overall weakness of the greenback, sellers of the pair have every chance of overcoming this price citadel, paving the way to the 1.35 mark.
So, as mentioned earlier, key inflation growth data were published in Canada, showing the overall Consumer Price Index (CPI) in October slowed to 3.1% on an annual basis (the weakest pace since June of this year). However, the core CPI, which does not include energy and food prices, reached 2.7%, surpassing the forecasted decline to 2.5%.
The report's structure indicates that the largest contribution to inflation is still made by interest payments on mortgage loans, the purchase of groceries in stores, and rent. In particular, interest payments on mortgages jumped by 30.5% (compared to the previous year), and the cost of housing rent increased by 8.2%. According to economists from major Canadian banks, consumers do not feel the inflation decline—for example, Canadians still pay nearly 25% more for a basket of groceries than three years ago.
In other words, on the one hand, inflation demonstrates a downward trend. On the other hand, inflationary indicators are still at too high a level. This suggests that the Canadian regulator may decide on another step towards tightening monetary policy. The head of the Bank of Canada, Tiff Macklem, does not exclude the realization of such a scenario. During his speech on Wednesday, he once again stated that the central bank is ready to further raise interest rates "if inflation does not decrease." According to him, the inflation level in the country remains too high to be called "comfortable," despite the downward trends of recent months.
At the same time, Macklem expressed concern about the slow pace of inflation decline. According to him, at upcoming meetings, the central bank members will discuss whether the central bank should stick to the achieved interest rate or whether additional steps are necessary to restore price stability.
Thus, the established fundamental background contributes to further price decline. The weakness of the greenback, Macklem's comments, and the contradictory data on inflation growth in Canada for October disappointed USD/CAD buyers. If the Canadian regulator tightens its rhetoric in the near future, allowing for additional tightening of the Monetary Policy Committee (MPC), the Canadian dollar will significantly strengthen its position, especially amid the overall weakening of the greenback.
The report on Canada's economic growth, scheduled for release next week on November 30, may play a certain role in reinforcing the downward trend. Over the past four months, the GDP volume (on an annual basis) gradually declined, reaching 0.8% in August. According to preliminary forecasts from experts, the indicator could rise to 1.0% in September. If the report comes out at least at the forecast level (not to mention the "green zone"), the loonie will receive additional support. Note that these data will be disclosed just a week before the December meeting of the Bank of Canada.
From a technical perspective, the situation is as follows. The USD/CAD pair on the daily chart is between the middle and lower lines of the Bollinger Bands indicator, as well as below the Tenkan-sen and Kijun-sen lines but above the Kumo cloud. The nearest targets for the downward movement are the levels of 1.3610 (upper boundary of the cloud) and 1.3560 (lower boundary of the cloud on D1, coinciding with the middle line of the Bollinger Bands on W1). At the moment, the pair is testing the support level of 1.3650 (the Tenkan-sen line on the weekly chart). Considering short positions with the mentioned targets is advisable only after overcoming this price barrier.