USD/CAD plummets under 1.3740 as sentiment improves

• USD/CAD dives below 1.3750 due to an upbeat mood and a soft US dollar.
• UK’s mini-budget U-turn sparked a rally in global equities.
• Canada’s inflation expectations rose further, justifying further BoC’s rate hikes.

The USD/CAD tumbled from around the 1.3800 figure due to a risk-on impulse, as shown by global equities recording gains, spurred by a U-turn in the UK mini-budget, which so far had stabilized the markets. At the time of writing, the USD/CAD is trading at 1.3729, below its opening price by 1%.

The Canadian dollar got bolstered by rising inflation expectations as the BoC’s Business survey showed

The absence of US economic data to be released on Monday keeps traders leaning on last week’s inflation figures, which, even though was higher-than-expected, sparked a rally in US equities. Nevertheless, investors backpedaled on Friday, with most indices closing in the red.

The St. Louis Fed President James Bullard said that faster interest rate hikes contributed to further US dollar strength against other currencies on Saturday. Bullar added that once the Federal funds rate (FFR) gets to a level “where the committee thinks we’re putting meaningful downward pressure on inflation,” so rates don’t need to continue increasing.

In the meantime, the Bank of Canaday Business sentiment survey showed that firms expect slower growth amidst the Bank of Canada’s (BoC) tightening cycle, which cools demand, with most responders foreseeing a recession likely in the next 12 months.

The BoC’s survey highlighted that businesses’ inflation expectations jumped to 7.11% from 6.82% in Q2, while for 2-years, the CPI is expected at 5.22%. That justifies further action by the Bank of Canada (BoC), as Governor Tiff Macklem said that the Bank needs “more work to do” on interest rates, signaling further hikes.

Therefore, the USD/CAD plunged as investors seeking return shifted to risk-perceived assets. Additionally, the greenback is pressured, as shown by the US Dollar Index, down almost 1% at 112.23, while crude oil prices are rising, with WTI’s paring some of last Friday’s losses, clings around $85.50 per barrel.

What to watch

The Canadian economic docket will feature House Starts Annualized, while the US calendar will reveal Industrial Production (IP), alongside Capacity Utilization and the NAHB Housing Market Index.

USD/CAD Key Technical Levels