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Canadian Dollar Talking Points

USD/CAD remains bid following the Bank of Canada (BoC) meeting as the central bank drops the hawkish forward-guidance for monetary policy, and recent price action brings the 2018-high (1.3665) on the radar as the exchange rate breaks out of a near-term range.

Image of daily change for major currencies

USDCAD Rate Forecast: Post Bank of Canada (BoC) Breakout Eyes 2018-High

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The fresh developments coming out of the BoC casts a bearish outlook for the Canadian dollar as the ‘Governing Council judges that an accommodative policy interest rate continues to be warranted,’ and Governor Stephen Poloz & Co. may continue to change their tune over the coming months as the central bank trims its growth forecast for 2019.

Image of bank of canada forecast

The Canadian economy is now anticipated to grow 1.2% per annum in 2019 versus an initial projection of 1.7%, and the central bank may continue to adjust its forecast over the coming months as ‘trade tensions and elevated uncertainty have been important drivers of the growth dynamic for both the global and Canadian economies.’ In turn, the BoC may continue to respond to the shift in U.S. trade policy as ‘ongoing uncertainty related to trade conflicts has undermined business sentiment and activity, contributing to a synchronous slowdown across many countries,’ and it seems as though the central bank will refrain from implementing higher interest rates as ‘the risks to the projected path for inflation are roughly balanced.’

However, the BoC may find it difficult to abandon the hiking-cycle as the central bank now anticipates stronger-than-expected inflation in 2019, and Governor Poloz & Co. may have little choice but to endorse a wait-and-see approach at the next meeting on May 29 as the slowdown in economic activity appears to be driven by temporary factors.

With that said, it remains to be seen if the BoC will continue to alter the forward-guidance for monetary policy as ‘the Bank projects that the economy will gradually strengthen through 2019 and will grow slightly above potential in 2020 and 2021,’ but the reaction to the updated Monetary Policy Report (MPR) raises the risk for a further advance in USD/CAD as the exchange rate breaks out of a narrow range, with the Relative Strength Index (RSI) highlighting a similar dynamic as the oscillator takes out the bearish formation carried over from the previous month.

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USD/CAD Rate Daily Chart

Image of usdcad daily chart
  • USD/CAD appears to be on its way to test the 2018-high (1.3665) following the string of failed attempts to close below the 1.3290 (61.8% expansion) to 1.3310 (50% retracement) region, with the topside hurdles on the radar as the exchange rate breaks out of the range-bound price action carried over from March.
  • The break/close above the 1.3420 (78.6% retracement) to 1.3460 (61.8% retracement) area raises the risk for a move towards 1.3540 (23.6% retracement), with the next region of interest coming in around 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion), which lines up with the 2019-high (1.3665).
  • Will keep a close eye on the RSI as it extends the bullish formation from earlier this year and works its way towards overbought territory.

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.