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Abstract: The Bank of Canada (BOC) is expected to keep the overnight rate at 5%. The statement will cite much evidence to prove that the interest rate hike so far has curbed economic growth. As the BOC is about to release its latest growth and inflation forecasts, market participants eagerly await insights that may reveal the bank's future monetary stance.

Fundamentals

The BOC's interest rate decision is the highlight of today's market because the market generally tends to keep the interest rate at 5.00%. The possibility of raising interest rates has weakened, especially after the consumer price index (CPI) data in September showed that inflation slowed down faster than expected.

At the same time, speculation about the possibility of a "hawkish stance" has poured in, which has opened the door for further tightening of policies. However, the market consensus on the BOC's next move is not consistent.

A recent poll in Reuters showed different opinions. Among the 18 economists surveyed, a slim majority of 8 think that the possibility of raising interest rates again is "very high". As for the interest rate cut, there are also differences of opinion. Nineteen economists expect interest rates to fall below the current benchmark by the end of June, while 11 economists expect to maintain or even exceed the current level.

We believe that the policy decision of the BOC in October is still uncertain. Since the BOC decided to suspend interest rate hikes in September, a series of economic data released are mixed. The weaker CPI data in September this week pushed the risk balance from interest rate hikes to another suspension. Most data show that the BOC has done enough.

Despite this, there are still problems in the inflation outlook, which may lead to further tightening of policies by the central banks. Policymakers will at least open the door to further interest rate hikes by sending the message of "further interest rate hikes when necessary". This tendency to raise interest rates may persist until inflation makes more lasting progress. A December rate hike cannot be ruled out, especially since there is one more CPI data to be released before the December rate hike.

It is worth noting that Wednesday's interest rate statement will be released together with the latest monetary policy report, and we will see a substantial downward adjustment of the GDP forecast trajectory. In addition, inflation expectations will need to be raised to reflect the stronger-than-expected price pressure in summer. Market participants are eagerly awaiting insights that may reveal the bank's future monetary stance.

In these discussions, the CAD performed poorly, even against the USD However, after the central bank meeting, the USDCAD didn't seem to be sold sharply as it did in early September. We believe that there are more upside risks in the range of 1.3800-1.3850, and then it will fall back below the range of 1.3500.

Technical Analysis

Ahead of the BOC's policy meeting, the USDCAD held on to resistance-turned-support from the 2020 highs and rose strongly on Wednesday to close in on previous highs in the 1.3787 range.

Breaking it, the latest bullish action may shift the market's attention to the 1.3800-1.3850 range. Technical indicators are pushing the market to open a new progression. The Relative Strength Index has returned to a positive slope above 50 and the MACD is moving higher above the 0-axis. However, the Stochastic Oscillator is still close to the 80 overbought level, which means that the bulls lack the power to push upwards. Moreover, in the 4H timeframe, the price itself has not yet closed above the symmetrical triangle resistance line at 1.3750; therefore, a pullback is possible.

If the pullback is in line with our expectations, the 1.3670-1.3680 range, which contains the 2020 bound line and the 20-day SMA, will be the first target. A close below this range could confirm further declines towards the 50-day SMA. A sharper decline could challenge the short-term uptrend line since July at 1.3535 and the 200-day SMA.

Overall, the USDCAD has the potential for further gains, but upside risks come with it. It is recommended to go short at the highs at the path with the least risk.

Trading Recommendations

Trading direction: Short

Entry price: 1.3762

Target price: 1.3454

Stop loss: 1.3880

Deadline: 2023-11-08 23:55:00

Support: 1.3740, 1.3701, 1.3661

Resistance: 1.3787, 1.3804, 1.3815