USD/CAD remains on the defensive above 1.3600 ahead of the BoC rate cut decision
- USD/CAD trades with mild losses near 1.3620 on Tuesday.
- The US business activity in the manufacturing sector contracted for the second consecutive month in May.
- Markets expect the BoC to cut its key lending rate by a quarter of a percentage point on Wednesday.
The USD/CAD pair remains on the defensive around 1.3620 during the early Asian session on Tuesday. The downtick of the pair is backed by the softer US Dollar (USD) to the 104.00 support level on Monday. Investors will shift their focus to the US Services PMI on Wednesday ahead of the highly-anticipated Nonfarm Payrolls (NFP).
The Institute for Supply Management (ISM) revealed on Monday that business activity in the manufacturing sector contracted for the second consecutive month in May. The US Manufacturing PMI declined to 48.7 in May from the previous reading of 49.2, below forecasts of 49.6. The weaker-than-expected reading exerted some selling pressure on the US Dollar (USD) and prompted speculation on Fed rate cuts this year.
On Friday, the US Nonfarm Payrolls (NFP) will take centre stage, which is estimated to see 190,000 job additions in May. In case of stronger-than-expected data, this could boost the USD.
The Bank of Canada (BoC) is expected to cut its overnight rate by 25 basis points (bps) to 4.75% on Wednesday as inflation in Canada cooled down in April. CIBC Capital Markets economists anticipate the BoC could cut its interest rate up to three times before the Fed begins easing policy. The divergence of policy rate between the BoC and Fed might drag the Canadian Dollar (CAD) lower and create a tailwind for USD/CAD. The BoC governor Tiff Macklem said that a rate cut is possible, but that the decision would be driven by economic data.