- The Canadian dollar has weakened against most major currencies (except against the JPY) in the past four weeks.
- Short-term FX positioning suggests that the expected BoC’s 50 bps cut may have been fully priced in.
- Watch out for a potential short-term mean reversion decline in the AUD/CAD cross pair.
In a few hours’ time today, the Bank of Canada (BoC) will announce its latest monetary policy decision where the consensus is expecting a fourth consecutive interest rate cut to its key policy interest rate with a higher magnitude of 50 basis points (bps) to bring it down to 3.75%.
The rationale for having a high expectation of a jumbo cut of 50 bps assigned to today’s BoC interest rate decision is that the inflationary trend in Canada has decelerated below the 2% inflation target.
Canada’s core inflation rate ticked slightly higher to 1.6% y/y in September from a three-and-a-half-year low of 1.5% recorded in August but remained below BoC’s 2% target since April this year.
Slack in the Labor Market Warrants a More Dovish BoC
Coupled with a weakening labor market where the unemployment rate increased to a 34-month high of 6.6% in August, albeit a slight downtick to 6.5% in September, it is no longer economically viable for BoC to maintain a higher degree of restrictive monetary policy as the current key policy interest rate of 4.25% is significantly higher by 265 bps from the core inflation rate in Canada.
However, markets are forward-looking as the Canadian dollar has weakened against the major currencies except against the Japanese yen in the past four weeks which suggests that today’s 50 bps cut from BoC may have been fully priced in.
A Mean Reversion Move to Offset Recent Canadian Dollar Weakness May Be in Progress
Fig 1: AUD/CAD medium-term & major trends as of 23 Oct 2024 (Source: TradingView)
The major uptrend phase of the AUD/CAD cross pair in place since the 28 September 2023 low of 0.8567 reached and reacted off the upper boundary of its year-long ascending channel on 30 September 2024.
In addition, medium-term upside momentum has weakened significantly as the daily RSI momentum indicator has staged a bearish breakdown below its parallel ascending trendline support and slipped below the 50 level (see Fig 1).
Watch the 0.9377 key medium-term pivotal resistance and a break below the 0.9170 intermediate support reinforces the short-term mean reversion decline of the AUD/CAD to expose the 0.9020 medium-term support (also the 200-day moving average).
On the other hand, a clearance above 0.9377 may see further weakness in the Canadian dollar where the AUD/CAD cross pair may squeeze higher for the next medium-term resistances to come in at 0.9520 and 0.9630.