The Canadian dollar is trading lower in the Wednesday session. Currently, USD/CAD is trading at 1.2619, up 0.30% on the day. The US dollar has rebounded today from its recent slide against the majors, with the exception of the Japanese yen.
Is Canada’s economy in trouble?
Canada’s GDP continues to flounder, as the economic recovery appears to have stalled. GDP for July came in -0.1%, marking a fourth successive decline. The Covid pandemic has not been contained, and some parts of the country are experiencing a fourth wave of the pandemic.
Despite the dismal growth figures, inflation has been moving higher, causing a major headache for policymakers at the Bank of Canada, who find themselves between a rock and a hard place with regard to interest rate policy. Higher rates would be an effective tool to curb inflation, but that could have a negative effect on a weak economy.
Oil prices have broken above the USD 80 level, which is a mixed blessing for the economy. Higher oil prices are good news for the government’s coffers, as Canada is a major oil producer. At the same time, an increase in energy prices for consumers means even higher inflation.
The Bank of Canada, taking a page out of the Fed playbook, has argued that inflation is transient. Fed Chair Powell has been forced to change his tune and admit that high inflation is not about to disappear. Will the Bank of Canada follow suit? Inflation hit 4.1% in August (YoY), the fight straight month that CPI broke above the Bank’s target range of 1-3%. If inflation remains above the 3% level over the next few months, the BoC may be forced to raise rates in the first half of 2022.
Investors will be keeping a close eye as both Canada and the US release employment numbers on Friday, which could result in some strong movement from the Canadian dollar.
- USD/CAD faces resistance at 1.2745 and 1.2849
- There is support at 1.2565 and 1.2489
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