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USDCAD Rate Risks Bearish Behavior as Fed and BoC Take Different Paths

USDCAD Rate Risks Bearish Behavior as Fed and BoC Take Different Paths

2019-07-12 00:30:00
David Song, Strategist
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Canadian Dollar Talking Points

USDCAD trades near the yearly-low (1.3037) even though the Bank of Canada (BoC) endorses a wait-and-see approach for monetary policy, and recent price action keeps the downside targets on the radar as the exchange rate fails to break out of the monthly opening range.

USDCAD Rate Risks Bearish Behavior as Fed and BoC Take Different Paths

The recent rebound in USDCAD has flopped ahead of the monthly-high (1.3145) as Federal Reserve Chairman Jerome Powell strikes a dovish tone in front of US lawmakers, and the exchange rate may exhibit a more bearish behavior over the coming days as the Federal Open Market Committee (FOMC) appears to be on track to implement a rate cut on July 31.

In contrast, the BoC may stick to the sidelines throughout 2019 as “growth in the second quarter appears to be stronger than predicted,” and the central bank may stick to the same script at the next meeting on September 4 as “recent data show the Canadian economy is returning to potential growth.

It seems as though the BoC will take a different path compared to the FOMC “with the US slowing to a pace near its potential,” and the diverging paths for monetary policy may fuel a further shift in USDCAD behavior as the exchange rate snaps the upward trend from earlier this year.

Image of DailyFX economic calendar

Keep in mind, updates to Canada’s Consumer Price Index (CPI) may rattle the recent strength in the Canadian Dollar as the gauge is expected to narrow to 1.9% from 2.4% per annum in May, but a one-off downtick in the headline reading for inflation may do little to alter the monetary policy outlook as Governor Stephen Poloz and Co. insist that “CPI inflation will likely dip this year because of the dynamics of gasoline prices and some other temporary factors.

In turn, USDCAD stands at a risk of exhibiting a more bearish behavior over the remainder of the year, with recent price action bringing the downside targets back on the radar as the rebound from earlier this week fails to take out the monthly-high (1.3145).

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USD/CAD Rate Daily Chart

Image of usdcad daily chart
  • The broader outlook for USDCAD is no longer constructive as the advance from the April-low (1.3274) stalls ahead of the 2019-high (1.3665), with the break of trendline support raising the risk for a further decline in the exchange rate.
  • The break of the February-low (1.3068) suggests there’s a broader shift in USDCAD behavior, but the failed attempt to break/close below the 1.3030 (50% expansion) region may generate range bound conditions amid the lack of momentum to hold above the Fibonacci overlap around 1.3120 (61.8% retracement) to 1.3130 (61.0% retracement).
  • A break/close below the 1.3030 (50% expansion) region brings the 1.2970 (78.6% retracement) to 1.2980 (61.8% retracement) region on the radar, with the next area of interest coming in around 1.2830 (38.2% retracement).

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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

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