USDCAD Drops Sharply Amid Broad US Dollar Weakness

As of writing, the Loonie traded 1% higher against the USD, pushing the USDCAD pair back toward 1.37. At the same time, the dollar index was seen retreating to 112.20, falling below the short-term uptrend line and losing 1% on the day.

Inflation is still a problem in Canada

The third quarter of 2022’s Business Outlook Survey was made public on Monday by the Bank of Canada (BoC). As interest rates rise and demand growth moves closer to pre-pandemic levels, the report notes that business confidence has weakened and that many firms anticipate slower sales growth. It also noted that while there are early indications that pressures on prices and wages have begun to ease, firms’ inflation expectations are still high.

Moreover, businesses anticipate a moderated growth in pricing as a result of downward pressure on the cost of commodities and other basic items. Additionally, they anticipate a slowdown in their salary growth from recent highs. The short-term inflation expectations of businesses continue to exceed the Bank of Canada’s inflation objective.

Firms’ forecasts for long-term inflation are more consistent recently and are significantly closer to the objective. The majority of companies who forecast inflation at or over 2% do so with a three-year horizon in mind.

Elsewhere, the New York Empire State Manufacturing Index fell sharply in October, printing -9.1 against expectations of -4, down from -1.5 in September, undermining the US dollar.

Testing major support

The USD has retreated to the major support area of 1.3710, and if not held, a further decline to 1.3650 could occur quickly while changing the short-term trend to bearish for the pair.

On the upside, the resistance seems to be at 1.38, and bulls must push USDCAD above it to regain control of the market.