The Bank of Canada's hawkish stance and its willingness to act preemptively pulled USD/CAD down from its highest level since April 2025. The loonie got a boost from capital outflows from the US stock market. But how long can these factors bolster the loonie? Let's examine this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Canada's labor market is cooling off.
- The BoC is poised to raise the overnight rate in October.
- Capital flows are supporting the loonie.
- Consider buying USD/CAD once it bounces off CA$1.4045 and CA$1.4.
Weekly Fundamental Forecast for Canadian Dollar
What does not kill you makes you stronger. One might expect that the drop in Canadian employment over the January–September period, the fastest since the 2008 global financial crisis outside the 2020 pandemic, would have given USD/CAD a boost. Instead, the pair failed to hold its highest level since April 2025 and fell sharply.
After employment fell by 68,300 in September and the unemployment rate rose from 6.4% to 6.5%, derivatives markets cut the odds of a Bank of Canada rate hike in late October to 20%. However, Tiff Macklem's hawkish comments pushed those odds back up to 80%, even though annual inflation rose to 3.1%, below Bloomberg economists' forecast. Core inflation and trimmed-mean CPI were virtually unchanged.
Canada's Inflation Trend
Source: Bloomberg.
Strictly speaking, the latest inflation and jobs data allow the Bank of Canada to take a wait-and-see approach. However, concerns that the energy crisis in the Middle East and the US–Canada trade dispute could lift inflation expectations are pushing the BoC to act preemptively.
Against this backdrop, Tiff Macklem's hawkish tone looks logical rather than surprising, as Canadian companies now expect inflation to reach 3.7% in Q3 2027, up from 3.2% in the previous survey. The governor noted that high oil prices are benefiting the Canadian economy. If the central bank waits too long to tighten policy, it may later have to raise the overnight rate by 50 basis points at a single meeting instead of 25.
Investors were quick to recall that the Bank of Canada was among the first central banks to tighten policy in 2022–2024, during the largest rate-hiking cycle in decades. It tends to act ahead of time, so weaker employment and lower-than-expected inflation are unlikely to hold it back.
USD/CAD Price vs. S&P 500–TSX Spread
Source: Yahoo Finance.
Markets now see a much higher chance that the BoC will raise the overnight rate from 2.25% to 2.5% on October 28, which makes a strong case for selling USD/CAD. There are other reasons too. As interest in AI cools, capital is moving out of the US stock market, which supports the Canadian dollar. The decline in the S&P 500–TSX spread reflects this shift.
Weekly USD/CAD Trading Plan
After reaching another set of bullish targets, the USD/CAD pair dropped sharply. However, the Bank of Canada is unlikely to move quickly, and the AI bubble is unlikely to burst. This creates an opportunity to buy the pair if the price climbs back above CA$1.4075 or bounces off support at CA$1.4045 and CA$1.40.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDCAD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
