The USD/CAD currency pair has gained momentum, reaching around 1.4220 during the early hours of trading in Europe on Wednesday. Market participants are eagerly awaiting the Minutes from the Federal Open Market Committee (FOMC), which could offer clues about a potential interest rate increase.
Recently, traders have scaled back their expectations for a Federal Reserve (Fed) rate hike at the upcoming October meeting, following weaker-than-expected US job data. Still, there are indications that the market is anticipating further increases either later this year or next year.
According to the US Bureau of Labor Statistics (BLS), the Nonfarm Payrolls (NFP) increased by just 29,000 in September, significantly down from the previous rise of 133,000 and below the market’s expectation of 90,000. The Unemployment Rate also ticked up to 4.2% in September from 4.1% in August.
On Tuesday, Kansas City Fed President Jeff Schmid remarked that the central bank must continue increasing its policy rate to combat inflation, even as rising long-term yields seem to be affecting certain sectors of the US economy.
The likelihood of a 25 basis point (bps) rate hike in October is currently estimated at 21.6%, a drop from about 51% just a week prior, according to the CME FedWatch tool. Conversely, the market sees an 86.2% chance of a rate increase at the December meeting.
Samara Hammoud, a currency strategist with Commonwealth Bank of Australia, noted that “with little forward guidance from Chair (Kevin) Warsh, markets have reacted sharply to each US data release and policymaker speech.” Hammoud believes the Fed will likely wait until December to implement another hike.
On a different note, crude oil prices have risen due to concerns about supply disruptions from an incoming storm affecting US oil production regions and assaults by Yemen’s Houthi forces on Saudi Arabia, which might impede the increased supply of Middle Eastern crude. It’s interesting to note that Canada, being a significant oil exporter, typically sees a rise in its currency, the Loonie, alongside higher crude oil prices.
Canada’s Political Landscape Shows Growing Tensions
Analysts at Rabobank have pointed out increasing political fragmentation in Canada. They highlighted that the separatist Parti Québécois garnered around 30 percent of the vote in the recent provincial election, obtaining 59 out of 127 seats—a near majority, but enough to establish a minority government. The tensions extend beyond Quebec, with Alberta set to vote on October 19 about considering its independence from Canada, indicating a broader rise in domestic political uncertainty.
Fed’s Schmid Addresses AI-Driven Inflation, Maintains Hawkish Stance
Schmid’s comments demonstrate a somewhat more hawkish perspective compared to historical trends, scoring an 8/10 on the FXS Speechtracker against a baseline of 7.5/10, reflecting ongoing worries about inflation. He noted that the labor force is “in a good place” and identified AI as a significant inflation driver, emphasizing the need for the Fed’s credibility, which suggests a willingness to maintain a restrictive policy approach despite elevated long-term rates. His assertion that “we still have a way to go in beating inflation” supports a continued hawkish bias, which tends to bolster the Dollar.
The FXS Fed Sentiment Index rose by 0.34 points to 137.91, indicating that recent remarks have pushed the aggregate outlook toward a more hawkish stance. Since the index is considerably above the neutral 100 threshold, coupled with the high Speechtracker score, markets are likely interpreting Schmid’s comments as favoring higher short-term rates, typically favoring the Dollar against lower-yielding currencies.
Technical Analysis: USD/CAD Maintains Positive Momentum
Analyzing the daily chart, the USD/CAD continues to exhibit a bullish trend. The price remains above both the 100-day simple moving average (SMA) and the 20-day middle band of the Bollinger Bands. The price action is pushing into the upper half of its recent range, with the upper Bollinger band serving as the next potential resistance, while the Relative Strength Index (RSI) at around 69.5 indicates strong momentum, albeit nearing overbought levels.
Looking at potential supports, the initial level appears at the Bollinger middle band near 1.4085, followed by a substantial support level at the 100-day SMA close to 1.4005. The lower Bollinger band, positioned at 1.3820, further reinforces this bullish outlook. On the upside, the nearest resistance is at the upper Bollinger band around 1.4355. A clear break above this level could continue the upward trend, while failure to do so might result in a pullback toward the aforementioned support levels.
