USDCAD trades flat ahead of key events 👀

📆 USDCAD lacks direction ahead of ADP print and BoC decision

USDCAD trades flat ahead of two key macro events scheduled for today - ADP report release at 1:15 pm BST and Bank of Canada rate decision at 2:45 pm BST. The first one will serve as a hint ahead of Friday's NFP report release, while the latter will be closely watched as the Canadian central bank is expected to deliver the first rate cut. Let's take a look at what to expect from the two events and how the situation on USDCAD chart looks!

What to expect from ADP report?

The first big event to watch today is the release of US ADP employment report for May, scheduled for 1:15 pm BST. Report is expected to show a 175k increase in US employment, following a 192k addition in April. This would be weaker growth than 3-month and 12-month averages, which currently are 192k and 199k, respectively. Some moderation in the jobs growth since 2021 can be clearly visible, but over the past 6 or so months it has been relatively stable at a pace of around 150-200k per month. This is a still strong growth.

A point to note is that ADP report have been regularly undershooting NFP readings in the second half of 2023 and in Q1 2024. So an in-line ADP reading today does not exclude another over-200k NFP print on Friday. However, April 2024 saw a change in this trend, with ADP coming in above NFP for the first time since July 2023. Nevertheless, a single data point is not enough to predict that we will see ADP reading exceeding NFP readings going forward.

Other recent reports from the US jobs market have been somewhat mixed - jobless claims have been coming in lower-than-expected but yesterday's JOLTS report on job opening have missed expectations once again. Nevertheless, JOLTS report was for April so it was somewhat outdated already.

ADP report has been undershooting NFP readings in the second half of 2023 and in Q1 2024. However, ADP reading for April came in higher than NFP print. Source: BLS, Macrobond, XTB Research

Bank of Canada expected to cut rates today!

The second big event of the day is rate decision from Bank of Canada, scheduled for 2:45 pm BST. Expectations are for the Bank to deliver the first 25 basis point rate cut today. Such an outcome is expected by 21 out of 30 economists surveyed by Bloomberg, while the remaining 9 expect rates to be kept unchanged. Money markets are pricing in an around 80% chance of BoC cutting rates today.

Conditions for the rate cut are there - Canadian CPI inflation dropped back into BoC target range (1-3%), while housing market, jobs and GDP data has been somewhat weakish recently. However, there is a risk that Bank of Canada may decide to stay put today. BoC was late to start rate hike cycle in 2022, what has impacted bank's credibility. The Bank will surely want to avoid scenario when it cuts rates today, but has to reverse the cut with later in case inflation re-accelerates. 

Having said that, there is a chance that BoC decides to hold rates unchanged today to gain more evidence of inflation moving sustainably towards mid-point of the target. Nevertheless, in such a scenario, BoC Governor Macklem would likely signal that the rate cut is imminent, with the market seeing it as a likely or almost certain hint of BoC cutting rates at July meeting.

Canadian CPI inflation, both headline and core, dropped into 1-3% BoC target range and is expected to drop further, giving BoC strong basis to cut rates. Source: Bloomberg Finance LP, XTB Research

A look at USDCAD chart

Given that we traders will be offered an important macro report from the US and rate decision from Bank of Canada, USDCAD will be the pair to watch this afternoon as it may enjoy elevated volatility. Taking a look at the chart at H4 interval, we can see that the pair has been trading mostly sideways in the 1.3600-1.3750 range recently. While ADP may trigger some short-term volatility, its releases have seldom triggered market reactions exceeding 0.15% over the past year. Situation looks different when it comes to BoC decision, especially as there is a slim chance that the Bank will surprise by holding rates unchanged.

Should Bank of Canada defy market expectations and keep rates unchanged today, CAD would likely benefit, leading to a drop on USDCAD market. In such a scenario, the first support level to watch will be 1.3650 area, while the lower limit of the range in 1.3600 area will be a key support to watch. On the other hand, should BoC deliver a 25 basis point rate cut and hint that the next move is coming as soon as July, the pair may jump with 1.3725 area being the first potential resistance.

Source: xStation5