Bank of Canada Eyes Rate Hikes

In a recent address at the International Monetary Fund meetings in Marrakesh, Morocco, Tiff Macklem, the Governor of the Bank of Canada, discussed the potential for future interest rate hikes in the context of geopolitical instability and persistent inflation. The Bank's upcoming rate decision on October 25 will consider various factors, including the impact of long-term bond yields on borrowing costs, and the role of savings in offsetting the effects of mortgage renewals at higher rates.

During a video conference from Marrakesh, Macklem clarified that higher bond yields would not replace the Bank's interest-rate policies aimed at controlling inflation. He noted that the surge in government bond yields reflects market expectations for sustained high central bank-set interest rates to realign inflation with the 2% target.

Despite challenges such as unrest in the Middle East and ongoing core inflation, Macklem expressed confidence in Canada's ability to achieve its 2% inflation target without severe economic disruption. He acknowledged the efficacy of higher interest rates in mitigating inflation, keeping future hikes as a viable option amidst potential market fluctuations and economic volatility.

However, the IMF flagged Canada among OECD countries as high-risk for mortgage defaults due to increasing household debt and interest rates, amplified by a surge in homebuying induced by the pandemic. While Canadian home sales fell for a third straight month in September, and the Canadian Real Estate Association downgraded its forecast for the year, anticipating that interest rates will remain elevated for longer than previously thought.

The Bank of Canada, which lifted its policy rate in July to a 22-year high of 5%, left it on hold last month. Money markets lean towards expecting one more tightening in the coming months. The Bank of Canada is set to release a comprehensive economic outlook on October 23, providing more insight into how various factors may influence its future decisions.

In the United States, the U.S. dollar touched a one-week high against a basket of currencies, driven by hot consumer prices data reinforcing expectations that the Federal Reserve may need to keep interest rates higher for longer. The consumer price index rose 0.4% in September, maintaining the annual rate at 3.7%, consistent with August. The Federal Reserve's stance on interest rates is expected to be influenced by rising U.S. Treasury yields and moderate underlying inflation.

U.S. consumer sentiment deteriorated in October, with households expecting higher inflation over the next year, but the labor market's strength is likely to continue supporting consumer spending. The University of Michigan's survey revealed a third straight monthly decline in sentiment, likely influenced by factors such as rising gasoline prices, violence in the Middle East, a continuing strike in the automobile industry, and political dysfunction in Washington. The survey's one-year inflation expectations increased to 3.8% in October from 3.2% in September. Consequently, the Canadian dollar could experience further depreciation relative to the US dollar and may exhibit a continuous fluctuation within an upper range.

Data for Technical Analysis (5H) CFD USD/CAD

Resistance : 1.3660, 1.3665, 1.3672

Support : 1.3644, 1.3639, 1.3632

5H Outlook

Source: Investing.com

Buy/Long 1 If the support at the price range 1.3634 - 1.3644 is touched, but the support at 1.3644 cannot be broken, the TP may be set around 1.3662 and the SL around 1.3629, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3660 - 1.3670, TP may be set around 1.3683 and SL around 1.3639, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3660 - 1.3670 is touched, but the resistance 1.3660 cannot be broken, the TP may be set around 1.3642 and the SL around 1.3675, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3634 - 1.3644, TP may be set around 1.3622 and SL around 1.3665, or up to the risk appetite.       

Pivot Points Oct 16, 2023 02:49AM GMT

Sources: Investing 1, Investing 2