USD/CAD Dips 1 Cent After the Second BOC 50 bps Rate Cut
Skerdian Meta•Wednesday, December 11, 2024•3 min read
USD/CAD remains supported by MAs technically, pushing the lows higher, while fundamentally this pair also enjoys support from a dovish BOC, which delivered the second 50 bps rate cut in a row, however markets were not satisfied today, which sent this pair almost 1 cent lower.
The USD/CAD pair has shown consistent support at the 20 SMA (gray), which has effectively limited pullbacks and pushed the lows higher. This technical pattern gained strength last week after a sharp rise in the Canadian unemployment rate by three percentage points, coinciding with the normalization of the U.S. non-farm payrolls report for November.
The U.S. NFP figures rebounded from October’s disruption caused by hurricanes and labor strikes, contributing to the pair’s rise. USD/CAD was trading just above 1.40, but these economic developments added upward momentum, pushing the price 2 cents higher, within reach of 1.42, buyers failed to break that resistance zone and today we saw a retreat toward 1.41.
USD/CAD Chart H1 – The 20 SMA Keeps Pushing the Lows Higher
This movement also reflected broader monetary policy dynamics, particularly the 50 basis points rate cut by the Bank of England. Canadian economic data has added to the bearish tone, especially with disappointing GDP figures. After stagnation in August, September’s GDP growth was a weak 0.1%, and October’s preliminary estimate echoed the same marginal expansion. More concerning is the decline in GDP per capita, which contracted by -0.4% in Q3, continuing a trend seen throughout 2023 and 2024. The rapid growth in population further obscures the underlying vulnerabilities in the Canadian economy, making the modest GDP growth appear less robust than it is.
USD/CAD’s recent upward movement, therefore, reflects both technical support and the ongoing challenges faced by the Canadian economy. The fundamental weakness highlighted by declining per capita output and tepid overall growth suggests the pair may remain supported in the current range unless significant economic improvements materialize.
Bank of Canada Policy Meeting for December
- Interest Rate Cut:
The Bank of Canada (BOC) reduced interest rates by 50 basis points, bringing the policy rate down to 3.25%. The previous rate was 3.75%, following a similar 50 bps cut on October 23.
- Monetary Policy Context:
- This marks the fifth consecutive rate cut.
- Economists widely anticipated this move, with markets pricing in a 90% likelihood of a rate cut.
- Changes in Guidance:
- The prior statement suggested further rate reductions if the economy aligned with forecasts; this language has been removed.
- The new statement emphasizes a decision-by-decision approach: “Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time.”
- It also highlights the substantial easing since June: “Governing Council has reduced the policy rate substantially since June.”
- Macklem’s Remarks:
- Governor Tiff Macklem stated that with rates now significantly lower, the central bank anticipates a more gradual approach to policy adjustments if the economy evolves as expected.
- He noted that Q3 GDP growth was weaker than anticipated, with Q4 tracking lower as well.
- The job market remains soft, though consumer spending and housing activity improved in Q3 due to lower rates.
- Growth and Inflation Outlook:
- Lower immigration targets suggest slower growth in 2025 than previously expected.
- A two-month GST tax break is expected to temporarily reduce inflation in January before reversing in February.
- Trade Uncertainty:
- The economic outlook is overshadowed by the possibility of new U.S. tariffs on Canadian exports, described by Macklem as “a major new uncertainty.”
Before today’s decision, market pricing suggested a 50/50 likelihood of a rate cut, with the next Bank of Canada (BOC) meeting set for January 29. The current rate trajectory strongly signals the BOC’s intention to continue easing, likely with smaller increments rather than 50 basis point cuts.
The January meeting market pricing reflects expectations for a 17-basis-point reduction, indicating a 70% probability of a moderate cut of 0.25% that would bring the policy rate to 3.00%. Following the removal of clear forward guidance for rate cuts from the main statement, the USD/CAD initially climbed from 1.4090 to 1.4140. However, Governor Macklem’s subsequent comments seemed to mitigate the impact of this shift.
USD/CAD
Skerdian Meta
Lead Analyst
Skerdian Meta Lead Analyst.
Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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