BoC Meets with Election in Background

Fundamental analysis of Forex market

The Canadian dollar is slightly lower in the Monday session. Currently, USD/CAD is trading at 1.2552, up 0.23% on the day. Financial markets are closed in both Canada and the US, so the pair is likely to have a quiet day.

After weeks of the Federal Reserve basking in the market spotlight, it’s the turn of other central banks this week, including the Bank of Canada, which holds a policy meeting on Wednesday.

BOC in the spotlight

The BoC is already on the path of policy normalization, having tapered its weekly bond purchases from CAD 5 billion to CAD 2 billion. The Bank had projected that it would raise interest rates in the second half of 2022, when inflation was expected to rise to the 2% level. However, there are two factors that could support an uneventful September meeting. First, the Q2 GDP reading underperformed, with a reading of -1.1% (2.5% exp.), and Covid-19 cases have been rising. The Bank may not want to signal that further tightening is on the way, with economic conditions not all that favorable. Second, a national election is being held on September 20, and the BoC will scrupulously want to avoid taking any steps that could have an impact on the election.

At the same time, there are some key economic indicators that can be relied on to make a case for further tapering. Inflation has climbed to 4%, double the BoC’s target, while employment has almost completely recovered from the dark days of April 2020, when Covid-19 appeared and severely curtailed the labor market. A signal from the Bank that further tapering is on the way could give a significant boost to the Canadian dollar.

Massive miss for US nonfarm payrolls

US nonfarm payrolls surprised with a huge miss on Friday, as the economy added only 235 thousand jobs in August. The consensus was around 750 thousand jobs and some forecasts were above the 1-million level.

The Fed has consistently said that a taper was dependent on stronger employment data, so the soft NFP release makes it very unlikely that the Fed will signal a taper at the next policy meeting on September 22nd. This is a bearish development for the US dollar, which could be in for a rough ride this week. The Canadian dollar has jumped 2.1% in the past two weeks, and the rally could continue when US and Canadian markets reopen on Tuesday.

 USD/CAD Technical

  • There are resistance lines at 1.2776 and 1.2936
  • The next support levels are at 1.2517 and 1.2418