The Bank of Canada will hold its next meeting tomorrow, July 14. After that, it will take a break until September. Several experts believe that tomorrow's meeting will not be just a "check-through" meeting – even if the Central Bank does not make any decisions regarding the further curtailment of QE, it will at least determine its further prospects. Many market participants are sure of this.
It can be recalled that the Canadian regulator reduced the volume of the asset repurchase program by 1 billion at its April meeting while revising its forecast regarding the timing of the rate hike. The members of the Central Bank admitted that such a decision could be made in the second half of next year. We can say that the Canadian regulator was a "pioneer" in this regard (along with the Reserve Bank of New Zealand) since, at that time, the US Federal Reserve held an unambiguously dovish position. Therefore, the Canadian dollar had a significant advantage over its US counterpart throughout April and almost all of May.
However, the fundamental picture for the USD/CAD pair underwent significant changes: the record increase in US inflation allowed many Fed members to tighten their rhetoric, allowing an early curtailment of QE. The Fed's median forecast was the "control shot", according to which the US regulator may raise the interest rate twice in 2023. Such prospects tipped the scales in the direction of the US dollar. The Canadian dollar reacted accordingly: the USD/CAD pair broke through the 6-year lows (i.e. from the base of the 20th figure) and rose by almost 600 points, approaching the borders of the 26th figure. In fact, the level of 1.26 is currently the buyers' target. So to speak, the unconquered high.
The future prospects of the pair in the medium term depend on three factors. First, this is the dynamics of US inflation, which will be released at 12:30 Universal time. Second, the speech of the Fed Chairman, Jerome Powell that will take place on Wednesday and Thursday and third, the results of the July meeting of the Bank of Canada. The main focus of traders' attention will be on the positions of the Fed and the Bank of Canada. If the Canadian regulator decides to take a wait-and-see attitude, the resulting uncorrelation will provide the US dollar with significant support.
The results of the last meeting of the Bank of Canada made it clear that the Canadian regulator is ready to continue moving towards the normalization of monetary policy. And although he maintained the status quo at the June meeting, he indicated in an accompanying statement that "decisions on the pace and size of QE implementation will be based on the current assessment of the sustainability and strength of the economic recovery." It is obvious that the focus will be on key indicators in the field of inflation, the labor market, and overall economic growth.
It should be recalled that the Canadian Nonfarm data, which were published literally last Friday, left a double impression. Here, the number of people employed in June rose by 230 thousand, with a forecast of growth to 172 thousand. The indicator left the negative area for the first time since March of this year and exceeded the forecast values immediately almost one and a half times. The unemployment rate also showed a positive trend, declining to 7.8% (from the previous value of 8.2%). This indicator has been increasing for two months, causing alarm among representatives of the Bank of Canada. Therefore, this decline, albeit minimal, is quite important for the Canadian dollar. Another positive aspect is the increase in the share of the economically active population. This indicator rose to 65.2% (a multi-year high) after a two-month decline.
However, one problem is expressed in the fact that the component of the number of employees increased only due to the indicator of part-time employment, while the component of full employment was in the negative area (the ratio of +263 thousand/-33 thousand). At the same time, it is known that full-time positions imply higher salaries and social security, having a beneficial effect on the consumer activity of Canadians and, ultimately, on inflationary growth in the country. Therefore, the published figures may alert the members of the regulator. On the one hand, almost all the components of the release were released in the "green zone". On the other hand, the overall positive is due to a temporary factor. In this case, it is an open question whether the regulator focuses its attention on this nuance.
It is also noteworthy that the latest GDP growth data reflected a slowdown in the Canadian economy: the indicator fell by 0.3% in monthly terms. As for the inflation indicators, there is a positive trend, but the Canadian regulator explains the growth of key indicators by the low base of last year.
In my opinion, the market has too high expectations regarding the possible results of the July meeting of the Canadian Central Bank. According to some experts, the Central Bank may reduce the volume of weekly asset purchases at tomorrow's meeting, while other analysts said that the regulator will only announce such a step in July, but implements it in September. It is obvious that if the Bank of Canada takes a wait-and-see attitude tomorrow (and given the recent "Canadian Nonfarm" and the situation with the spread of the delta strain, this option cannot be ruled out), the Canadian dollar will be under the strongest pressure. In this case, the conquest of the 1.26 level will only be a matter of time.
From the technical point of view, USD/CAD bears have tried several times over the past 10 days to break through the support level of 1.2440 (Tenkan-sen line on the daily chart), but they failed. The pair is located between the middle and upper lines of the Bollinger Bands indicator, which indicates the priority of the upward movement. In addition, the price is located above all the lines of the Ichimoku indicator (including the Kumo cloud), which also indicates the priority of longs. Considering medium-term trading, long positions can be opened around the middle of the 24th figure. The target is the level of 1.2530 – this is the resistance level that corresponds to the upper line of the Bollinger Bands on D1.
