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Will the Bank of Canada Trigger Another Leg of USD/CAD Weakness?

Will the Bank of Canada Trigger Another Leg of USD/CAD Weakness?

James Stanley, Senior Strategist

Talking Points:

- The Bank of Canada hosts an interest rate decision with a very legitimate chance of a rate hike.

- IG Client Sentiment is showing approximately 1.1 traders long for every one short in USD/CAD ahead of this morning’s release.

- Are you looking to improve your trading approach? Our Traits of Successful Traders can help, and it’s free-of-charge.

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One of the few Central Bank items for this week gets underway later this morning, when the Bank of Canada hosts an interest rate decision with a very legitimate chance of getting a hike. As my colleague Christopher Vecchio discussed earlier this morning, rates markets are pricing in an approximate 85% chance of a bump-higher today; and as usual, the guidance provided by the bank towards future rate moves will be key as investors look to price-in any new information.

The battle lines appear to already be drawn in USD/CAD. There are two moves of relevance over the past year, and each mirrors what’s been taking place around the Bank of Canada. It was just last May that the bank started talking about rate hikes. This caught many by surprise, as we’d went almost a decade without any such moves from the BoC. As that theme was starting to get priced-in to CAD, USD/CAD went into a strong down-trend that, eventually, created a fresh yearly low in the pair by the end of July. The Bank of Canada wasn’t yet done – posing another rate hike in September with USD/CAD making a fast approach towards the 1.2000 psychological level.

If you’re looking for longer-term analysis on USD and/or CAD, check out our Q1 Forecasts

USD/CAD Daily: CAD Strength on Hawkish BoC Drives the Pair From May to September

USD/CAD Daily

Chart prepared by James Stanley

The second move of relevance was the retracement that began shortly after that second rate hike. The U.S. Dollar set a bottom in early September, and this is around the time that USD/CAD began trading higher. This retraced approximately 50% of that first bearish move, where resistance set-in, and that resistance held all the way into mid-December.

A Fibonacci retracement applied to that move is what appears to be helping to set current support and resistance values. As the U.S. Dollar breakdown was starting to show towards the end of last year, USD/CAD started to trend-lower, and eventually ran into support around the 61.8% retracement of that move. After a quick bounce, sellers showed-up around the 38.2% retracement. In between these two values, we have the 50% Fibonacci retracement very near the whole number of 1.2500.

USD/CAD Daily: September-December Retracement Wipes Out 50% of the Move Before Bears Return

USD/CAD Daily

Chart prepared by James Stanley

Collectively, these two Fibonacci retracements can be combined to produce a potential resistance zone that runs from 1.2471-1.2500. The price of 1.2471 is the 23.6% retracement of the first move that we looked at, while 1.2491 is the 50% retracement of the second move; and 1.2500 is a major psychological level.

For those already carrying bearish exposure, this can be an interesting area to investigate for stop placement on short-side setups. For those not currently carrying exposure: If prices move into this zone to find resistance around this morning’s BoC rate decision, the door is opened for bearish continuation strategies centered on the longer-term move. If, however, prices budge above this zone, traders will likely want to approach shorts with caution, instead looking for resistance around 1.2600, or the 38.2% retracement of the second move we looked at, and also the area where resistance had set-in last week.

USD/CAD Four-Hour: Potential Resistance Zone From 1.2471-1.2500

USD/CAD Four-Hour

Chart prepared by James Stanley

--- Written by James Stanley, Strategist for DailyFX.com

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

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