October 29 is an important day for the Canadian dollar. The Bank of Canada will hold its next meeting. Most analysts believe the result of the October meeting will be a 25-basis-point interest rate cut due to the slowdown in the Canadian economy. However, some experts do not rule out the possibility that the central bank will adopt a wait-and-see position or implement a "hawkish cut." This scenario is not out of the question, given the inflation growth data published last week in Canada.
To remind, the overall consumer price index rose by 0.1% month-on-month in September. Despite pessimistic forecasts, the index emerged from negative territory (down 0.1% in August), reflecting weak yet still positive growth. Year-on-year, the CPI jumped to 2.4%, above the forecast of 2.3% — the strongest rate of growth since February of this year. The indicator shows an upward dynamic for the second consecutive month, indicating the formation of an upward trend. The core consumer price index accelerated in September to 0.2% month-on-month (after zero growth in the previous month) and to 2.8% year-on-year (the highest figure since November 2023). Other inflation indicators, including the Median Core CPI, which rose to 3.2% (forecast 3.0%), and the Trimmed Core CPI, which increased to 3.1% (forecast 3.0%), also remained above the central bank's target.
The inflation growth report for September is an argument for maintaining the interest rate at its current level. And this is not the only argument. A strong labor market also increases the likelihood that the Bank of Canada will maintain the status quo, despite most analysts' dovish forecasts. According to recently published data, employment in Canada increased by 60,000 in September, while the unemployment rate remained at 7.1% (forecast 7.2%). Notably, employment growth was driven solely by an increase in full-time employment, while the part-time component decreased by 45,000.
Retail sales further complemented the fundamental picture: the total retail trade volume increased by 1.0% (after a sharp drop to -0.7% in the previous month), while the core (seasonally adjusted) rose by 0.7%, following a decline to -1.1%.
Proponents of the "dovish" scenario point to the slowdown in the Canadian economy and to the pessimistic statements made by Bank of Canada Governor Tiff Macklem last week. According to the latest data, Canada's GDP contracted by 1.6% year-on-year (forecast: -0.6%) – the weakest figure in the last four years. The volume of exports dropped by 7.5% (a five-year record low), and business investments fell by 0.6% (a record low since 2020).
Regarding the labor market, supporters of the "dovish" scenario also reference recent statements from Bank of Canada Governor Tiff Macklem, who noted that the September employment gain "only partially compensated for the job losses over the previous two months." He also highlighted that at the beginning of this year, the unemployment rate was 6.6%, and it has risen to 7.1% over the past 9 months.
Pessimistic comments from the Bank of Canada's governor sparked speculation that the central bank might indeed cut rates by 25 basis points this month. However, the market does not have a unified opinion regarding the pace at which the central bank will ease monetary policy. Additionally, there is no consensus on the potential outcomes of the October meeting. In particular, analysts from BofA Global Research predict only one possible rate cut this year – not this month, but at the December meeting.
In other words, the intrigue remains, and any trading positions on the USD/CAD pair are inherently risky, especially since a few hours after the Bank of Canada meeting, the Federal Reserve's October meeting outcomes will be announced. There may also be surprises here, considering the growing dovish expectations concerning the Fed's further actions. If the Bank of Canada decides to cut rates while the U.S. Federal Reserve members express doubts about the prospects for a December rate cut, the USD/CAD pair may not only return to the 40s range but also test the resistance level of 1.4070 (the upper line of the Bollinger Bands on the daily chart).
However, an alternative scenario is also possible – the Bank of Canada maintains the status quo while the Fed expresses dovish comments, allowing for another round of rate cuts at the end of the year. In this case, the bears of USD/CAD would benefit, opening a path towards the support level of 1.3910 (the lower line of the Bollinger Bands on D1) with the prospect of a decline into the 38s range.
The intrigue continues, so it is advisable to maintain a wait-and-see stance on the pair.
