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FX Week Ahead: December BOC Rate Decision and USD/CAD Rate Forecast

FX Week Ahead: December BOC Rate Decision and USD/CAD Rate Forecast

Christopher Vecchio, CFA, Senior Strategist
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Bank of Canada Meeting Overview:

  • The December Bank of Canada rate decision will conclude on Wednesday, December 9 at 15:00 GMT. No change in the main interest rate is anticipated.
  • USD/CAD rates have recently fallen to fresh monthly lows after a disappointing November US jobs report and a better than expected November Canadian jobs report.
  • Retail trader positioning suggests a bullish bias to USD/CAD rates.

12/09 WEDNESDAY | 15:00 GMT | CAD Bank of Canada Rate Decision (DEC)

The December Bank of Canada rate decision will conclude on Wednesday, December 9 at 15:00 GMT. The BOC has been maintaining its emergency low interest rate regime since the start of the coronavirus pandemic, and amid building economic momentum, it appears unlikely that policymakers will be acting again anytime soon.

Recall the commentary by BOC Governor Tiff Macklem in recent weeks, that if you are a household considering making a major purchase, if you’re a business considering investing, you can be confident that interest rates will be low for a long time.” To this end, the BOC does not appear to change its tone to stand in the way of further Canadian Dollar strength.

Bank of Canada Interest Rate Expectations (DECEMBER 7, 2020) (Table 1)

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Accordingly, interest rate expectations have evaporated due to the clear forward guidance offered by BOC Governor Macklem. Four months ago, in mid-August, there was a 17% chance of a 25-bps rate cut by December 2020. Now, there is a 0% chance for December 2020, an expectation that carries through September 2021.

Pair to Watch: USD/CAD

USD/CAD RATE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2019 TO DECEMBER 2020) (CHART 1)

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In our last update it was noted that, “Now that the fresh yearly lows have emerged, USD/CAD rates may be biased to continue lower towards a longer-term Fibonacci retracement: the 38.2% retracement from the 2012 low to 2016 high at 1.2758.Since the prior update, USD/CAD rates fell as low as 1.2770 before rallying at the start of this week.

USD/CAD rates continue to trade below their daily 5, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD is trending below its signal line (and gaining pace), while Slow Stochastics are holding firmly in oversold territory. The path of least resistance is lower for USD/CAD rates, at least until the daily EMA envelope is broken (USD/CAD rates close above the daily 21-EMA). A near-term bounce higher won’t negate the significant technical damage done in recent weeks.

IG CLIENT SENTIMENT INDEX: USD/CADRATE FORECAST (DECEMBER 7, 2020) (CHART 2)

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USD/CAD: Retail trader data shows 73.92% of traders are net-long with the ratio of traders long to short at 2.83 to 1. The number of traders net-long is 13.28% higher than yesterday and 3.20% higher from last week, while the number of traders net-short is 28.99% higher than yesterday and 3.37% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/CAD price trend may soon reverse higher despite the fact traders remain net-long.

Read more: FX Week Ahead: November Mexican Inflation & USD/MXN Rate Forecast

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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