The dollar rose slightly against the Canadian dollar, with weak Canadian data supporting expectations of a rate cut

The dollar edged higher against the Canadian dollar in Asia on Friday, trading around 1.3840. The dollar continued to rebound after rising about 0.25% in the previous session, and the market focused on the University of Michigan consumer confidence index released later.

Although the dollar has recovered in the short term, the potential upside of the US index is still limited. The US CPI rose 2.9% year-on-year in August, in line with expectations, but higher than 2.7% in July; it rose 0.4% month-on-month, higher than the previous value of 0.2%. Core CPI rose 3.1% year-on-year, in line with expectations.

Meanwhile, initial jobless claims in the US rose to 263,000, the highest level since 2021, above market expectations 235,000 and a revised 236,000. That suggests a weak job market could support the Federal Reserve's 25 basis point rate cut next week, while the likelihood of a half-point rate cut is also rising.

Analysts believe that the weak jobs data has increased market bets on the Federal Reserve to cut interest rates, limiting further strengthening of the dollar.

On the other hand, weak labour force and inflation data in Canada further boosted market expectations for a short-term interest rate cut by the Bank of Canada. The market currently expects a rate cut probability of about 70% next week. Weak CPI data may further raise interest rate cut expectations, providing support for the US dollar against the Canadian dollar.

Experts point out that the weakness in Canadian economic data increases the likelihood that the BoC will adopt an accommodative monetary policy.

From the daily chart, the US dollar has recently rebounded to around 1.3840 against the Canadian dollar. Short-term resistance is at 1.3865 and 1.3890. If it breaks through the resistance, it may test the 1.3920 area. The lower support levels are at 1.3810 and 1.3785. If it falls back to the support area, it may trigger a short-term buying rally.

The RSI index remains near 55, indicating that there is still some room for action, but if the market further heats up expectations for the Federal Reserve to cut interest rates, it may trigger a pullback in the dollar.

Editorial Views:

Overall, the dollar's rebound against the Canadian dollar was more supported by short-term technical fixes and market expectations for Canadian interest rate cuts. Weak U.S. employment data and high CPI are intertwined, leaving the direction of Federal Reserve policy still uncertain.

The short-term focus remains on the follow-up performance of US consumer confidence data and Canadian CPI and employment data, while paying attention to whether the 3865-1.3890 resistance zone can be effectively broken through.