Home USD/CAD Forecast: CAD Yield Inversion Points to Recession

USD/CAD Forecast: CAD Yield Inversion Points to Recession

  • Canada’s bond market shows a deep yield curve that could mean a recession.
  • Markets are expecting the BoC to deliver a 25bps rate hike on Wednesday.
  • Canada’s economy showed some resilience after positive jobs and GDP data.

Today’s USD/CAD forecast is bearish as the Canadian dollar strengthens ahead of the BoC meeting. The Bank of Canada is coping with an economy that is likely more heated than previously believed. The bond market’s most glaring sign is that a recession and lower inflation are approaching.

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Canada’s central bank states that the economy must cool off from its overheated levels to reduce inflation. If it exceeds that objective, its tightening push might result in a more severe slump than planned.

The bond market can indicate that risk. The 10-year Canadian government bond yield has decreased by roughly 100 basis points below the yield on the 2-year bond, more inverted than the US Treasury yield curve. Some analysts believe that curve inversions are signs of a coming recession.

Following many hefty rate hikes in recent months, the BoC has indicated that it may restrict rate increases to a quarter of a percentage point.

Money markets anticipate a 25-basis-point hike when the bank meets on Wednesday, although a slim majority of economists in a Reuters poll expect a larger move.

According to Canada’s employment data for November, the labor market is still tight, and the third quarter’s GDP increased at an annualized pace of 2.9%, showing a resilient economy.

USD/CAD key events today

Investors will pay attention to the building permits report from Canada, which will show the state of Canada’s housing market, and the ISM non-manufacturing PMI report from the US.

USD/CAD technical forecast: Bears on the verge of breaking below 1.3400

USD/CAD forecast

The 4-hour chart shows the 30-SMA above the price and the RSI below 50, supporting a bearish move. Bears strengthened when the price broke below the 1.3500 support level and the 30-SMA. There was a short pause at the 1.3400 support level, where bulls came in for a retracement.

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The move could neither go above the 30-SMA nor the 1.3500 key level, so the price made a lower high. The price has bounced lower and is threatening to break below 1.3400. If this happens, it will likely fall to 1.3325, a lower low.

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Saqib Iqbal

Saqib Iqbal

Saqib Iqbal is a market analyst, prop fund trader and mentor, serving the industry with his analysis and educational content since 2011. The author has great exposure to different financial markets and institutions. He's well-known for his day trading reviews and multiple timeframe analysis.