Date: 09 Jul 2019

The Bank of Canada rate decision this week could see Canadian policymakers moving away from the central bank’s current neutral policy stance as the domestic economy continues to outperform. The weaker than expected Canadian monthly jobs report last Friday is unlikely to dampen the improving sentiment towards the Canadian economy, due to the strong wage growth seen inside the report.

Recent data points have shown that the Canadian economy is back-on-track, following a softer than predicted patch during the start of this year as the global economy cooled-off. Core inflation is currently threatening to overshoot the Bank of Canada’s target, while wage growth showed a tremendous pick-up inside the June jobs report on Friday.

A strong rebound in the price of oil, due to U.S and Iranian tensions, and improving consumer confidence numbers have also helped lift the Canadian economy. The only real areas of concern for the Bank of Canada will be the continued overheating of the property market and the current downturn in the Canadian manufacturing sector.

A more hawkish tone is certainly warranted on Wednesday from Central Bank Governor Stephen Poloz, it now remains to be seen if Canadian policymakers need more time to access domestic data. Another major consideration could be the Canadian Dollar, as it currently trades at its highest level against the U.S Dollar since October 2018.

Should the Bank of Canada become more bullish toward the economy, traders and investors will naturally anticipate that the central bank could hike rates this year, sending the USD/CAD pair lower in the process. The possible policy divergence between the Bank of Canada and the Federal Reserve will then become more apparent, particularly if the U.S central bank still intends to hike rates.

 

USD/CAD Mountain Chart| Source: ActivTrader

USD/CAD Mountain Chart| Source: ActivTrader

 

With the USD/CAD pair trading below the 1.3100 level, any bullish commentary from the Bank of Canada could send the pair back into the 1.2500 to 1.3000 price range. The daily time frame shows a large ascending price channel, with the USD/CAD pair fast approaching the bottom of the channel.

 

Written by Nathan Batchelor, External Analyst, ActivTrades

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