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Hawkish BoC, better than expected jobs report pushes CAD higher

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The Canadian dollar strengthened for fourth consecutive week against the US dollar, rising over 2% by Friday’s close. USDCAD fell to a two-year low on Friday as price tested lows of 1.2061.

Further gains can be expected from the USDCAD as the economy continues to push ahead at full steam.

BoC hikes interest rates in September

The Loonie gained sharply last week as a result of a rate hike from the Bank of Canada. The BoC surprised the markets by hiking interest rates by 25 basis points, bringing the overnight lending rate to 1.0%. This was the second rate hike from the BoC this year. The BoC had initially hiked interest rates in July this year.

The rate hike came after BoC’s Poloz gave hawkish commentary at a banking conference in Portugal. The BoC also became the second G7 central banks to hike interest rates after the Federal Reserve in the US.

In its statement, the BoC said that the strong GDP numbers helped to make the decision to hike rates. This comes despite Canada’s inflation still lingering below the BoC’s 2% target rate. The overnight index swaps markets were pricing in a rate hike from the BoC but expected this to happen only later in the fourth quarter.

Despite the surprise interest rate hike, the markets are now expecting the BoC to push through with another rate hike by December this year.

Canada’s GDP was seen rising sharply as the second quarter annualized GDP growth rate hit 4.5%, beating expectations of a 3.3% increase. The data underscored the supportive economic which is also being fueled by a booming housing market. Regional indicators suggested rising prices in cities such as Vancouver and Toronto.

Canada’s unemployment rate falls to 6.2%

Following the BoC’s decision, later in the week Statistics Canada released the monthly employment numbers. Data showed that the Canadian economy added 22,200 net jobs in the month of August. This was above the median forecasts which suggested that the economy might have added 15,000 jobs during the period.

Canada Unemployment Rate: 6.2%, August 2017. Source:
Canada Unemployment Rate: 6.2%, August 2017. Source:

Most of the jobs came from hiring activity for full-time jobs which as another reason for the Canadian dollar to react bullishly. While the economy shed 88k jobs, it was offset by an increase of 110k in the part-time sector.

Canada’s unemployment rate also fell for the third consecutive month to 6.2% marking a fresh low since the 2008 global crisis. Besides the dip in the unemployment rate, Canadian wages were also seen rising sharply.

Data showed that wages rose at the fastest pace in 10-months in August. However, wage growth remains well below 2% annualized growth.

USDCAD – Technical Outlook

Just a week ago we wrote about the descending triangle pattern that was forming on the USDCAD’s weekly time frame. The support level that was formed at 1.2540 was finally breached last week on the back of the BoC and the jobs report.

The break down in the currency pair suggests further bearish momentum to continue as price is seen fast approaching the initial target of 1.1956. Further downside over the medium term could eventually push the USDCAD down towards the final target level of 1.1212. This would mark a completion of the descending triangle chart pattern.

USDCAD - Break down from the descending triangle pattern
USDCAD – Break down from the descending triangle pattern

In the near term, we can expect some consolidation to occur in the currency pair. This will keep USDCAD range bound within 1.2540 and 1.1956 levels. The next main catalyst for USDCAD will be coming from the Fed’s interest rate decision later this month.

Despite the central bank likely to go ahead with balance sheet normalization, the markets are likely to remain in a bearish mode for the USD. This should potentially see USDCAD driving lower as a result.

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