The Canadian dollar (CAD) has gained traction against its U.S. counterpart (USD) during the week, supported by a moderation in domestic inflation and investors’ assessment of the latest Federal Reserve meeting minutes.
The loonie, as the CAD is informally known, advanced by 0.22% to 1.3694 per dollar at closing on Thursday. Its trading range spanned the 20-day and 50-day moving averages, at $1.3747 and $1.3675, respectively.
One factor that has impacted the CAD recently is Canada’s annual inflation rate, which unexpectedly eased to 3.1% in October due to a significant reduction in oil prices, while core inflation measures retreated to their lowest levels in roughly two years. This confirms that the Bank of Canada (BoC) will likely lead on monetary policy decisions compared to other major central banks, such as the Fed and ECB.
Some traders now almost fully anticipate a BoC rate cut by April 2024 and project three cuts in total next year. Despite the recent strength of the loonie, Speculators have increased their bearish bets on the Canadian dollar to the highest level since June 2017, according to data released on Friday by the U.S. Commodity Futures Trading Commission.
The U.S. dollar index (DXY) partially recovered from recent declines against a basket of major currencies as Fed officials at their last monetary policy meeting indicated a potential shift towards a more cautious approach to future rate hikes.
As a result, and as mentioned above, the Canadian dollar has been trading in a narrow range between its 20-day and 50-day moving averages. The 20-day moving average is also the base of the Bollinger bands, which have been closing their gap recently, showing reduced volatility for the USDCAD. In addition, if the Canadian dollar keeps getting more robust and breaks below the 50-day moving average, the $1.3640 level is a significant weekly support for the price, and beyond the lower Bollinger band, it will be a third support at $1.3624. Otherwise, the 20-day moving average is the most significant resistance at $1.3747. Above the $1.3862 level is the next significant upper level for the price, just below the upper limit of the Bollinger bands (just seven pips below).
Please note that this analysis is provided for informational purposes only and should not be considered as investment advice.
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