The USD/CAD exchange rate soared to its highest level since April 2020 amid the rising concerns about the US and Canada trade war, and the upcoming Bank of Canada (BoC) interest rate decision. The pair jumped to 1.4180, up by almost 20% from its lowest level in 2021.
BoC interest rate decision
The BoC will start its two-day monetary policy meeting on Tuesday and then deliver its decision on Wednesday.
Economists believe that the bank will continue with its interest rate cuts in this meeting, a move it hopes will help to support the economy.
The BoC has been one of the most dovish central banks in the developed world as it slashed rates in the last four consecutive meetings. It has moved from 5.0% to the current 3.75%.
Analysts expect it to cut them by 0.50%, bringing the benchmark lending rate to 3.25%, its lowest level since 2022.
These cuts are happening because the Canadian economy is slowing, while inflation has moved to its 2% target. Data released in November showed that the headline CPI rose from 1.6% in September to 2.0% in November. It was higher than the median estimate of 1.9%.
Additional data released last week showed that the economy expanded by just 1% in the third quarter, lower than what the bank was expecting. This economic growth was driven by consumer and government spending as business investments dropped.
Another report released last week showed that Canada’s labor market was relatively mixed. The unemployment rate rose from 6.5% in October to 6.8% in November, worse than the expected 6.6%. This happened even as Canada’s economy added over 50.5k jobs during the month.
The BoC will also cut rates as concerns about a trade war between Canada and the United States rose. Donald Trump has threatened to impose a 25% tariff on Canadian imports, citing the immigration crisis.
Read more: USD/CAD forecast: Canadian dollar outlook amid Trump tariff threat
Fed decision and US inflation data ahead
The other key USD/CAD news will come out on Wednesday when the US publishes the latest consumer price index (CPI) data. Economists polled by Reuters expect the data to show that prices rose slightly in November.
Precisely, economists see the headline CPI coming in at 2.7%, a small increase from the recent 2.5%. Core inflation, which excludes the volatile food and energy prices, is expected to remain at 3.3%.
Economists hope that the Federal Reserve will also cut interest rates in its meeting next week. Still, some a strong CPI reading may push the Fed to wait before cutting.
As such, the difference in the US and Canadian interest rates has formed a good carry trade opportunity. A carry trade happens when investors borrow from a low-interest-rate country and invest in a high-interest-rate one.
USD/CAD technical analysis
USD/CAD chart by TradingView
The weekly chart shows that the USD to CAD exchange rate has been in a strong bullish trend in the past few weeks. It has moved above the important resistance level at 1.3975, the upper side of the ascending triangle pattern. This triangle is one of the most bullish patterns in technical analysis.
It has moved above the 78.6% Fibonacci Retracement point at 1.4100. The Relative Strength Index (RSI) and the MACD indicators have also continued rising. The RSI has moved close to the oversold level, while the MACD indicator has continued rising.
Therefore, the pair will likely continue rising as bulls target the next key resistance level at 1.4675, its highest level in 2020. The stop-loss of this trade will be at 1.3975, the upper side of the ascending triangle pattern.
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