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USD/CAD Rate Depreciation Stalls Ahead of BoC and Fed Rate Decisions

USD/CAD Rate Depreciation Stalls Ahead of BoC and Fed Rate Decisions

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Canadian Dollar Talking Points

The recent decline in USD/CAD appears to have stalled ahead of the Bank of Canada (BoC) interest rate decision, but the Canadian Dollar may continue to outperform its US counterpart as the Federal Reserve is widely expected to reduce the benchmark interest rate by another 25bp in October.

USD/CAD Rate Depreciation Stalls Ahead of BoC and Fed Rate Decisions

USD/CAD trades near the monthly-low (1.3053) as the BoC appears to be on track to retain the current policy throughout the remainder of the year, while the Federal Open Market Committee (FOMC) comes under increased pressure to insulate the US economy.

Image of BoC interest rate

The BoC may continue to endorse a wait-and-see approach for monetary policy after keeping the benchmark interest rate at 1.75% as “Canada’s economy is operating close to potential and inflation is on target.”

Governor Stephen Poloz and Co. appear to be in no rush to alter the forward guidance as “the current degree of monetary policy stimulus remains appropriate,” but the Federal Open Market Committee (FOMC) may continue to respond to the shift in US trade policy as the International Monetary Fund (IMF) cuts its growth forecast for the world economy.

Image of Fed Fund futures

In fact, Fed Fund futures continue to reflect a greater than 90% probability for another 25bp reduction on October 30, and Chairman Jerome Powell and Co. may continue to endorse a dovish forward guidance as US President Donald Trump tweets that the “Fed was way too fast to raise, and way too slow to cut.”

However, it remains to be seen if Fed officials will project a lower trajectory for the benchmark interest rate as a few participants judged “that it might become necessary for the Committee to seek a better alignment of market expectations regarding the policy rate path with policymakers' own expectations for that path.”

The growing dissent within the FOMC may limit the central bank’s scope to implement lower interest rates, and the committee may show a greater willingness to conclude its rate easing cycle as Fed officials see the benchmark interest rate around 1.50% to 1.75% through 2020.

With that said, a material change in the Fed’s forward guidance may heighten the appeal of the US Dollar, but more of the same from the FOMC may keep USD/CAD under pressure amid the deviating paths for monetary policy.

In turn, USD/CAD may continue to give back the advance from the 2019-low (1.3016), with the exchange rate at risk of exhibiting a more bearish behavior if the FOMC shows a greater willingness to further embark on its rate easing cycle.

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USD/CAD Rate Daily Chart

Image of USD/CAD daily chart

Source: Trading View

  • Keep in mind, the broader outlook for USD/CAD is no longer constructive as it clears the February-low (1.3068), with the break of trendline support fostering a bearish outlook for the exchange rate.
  • Moreover, the rebound from the 2019-low (1.3016) has failed to generate a test of the Fibonacci overlap around 1.3410 (38.2% expansion) to 1.3420 (78.6% retracement), with recent price action bringing the downside targets back on the radar as USD/CAD takes out the September-low (1.3134).
  • At the same time, the Relative Strength Index (RSI) offers bearish signal as the oscillator snaps the bullish formation from July and approaches oversold territory.
  • However, the recent decline in the RSI has failed to trigger an oversold reading, with the lack of momentum to push below 30 raising the risk for a short-term rebound in USD/CAD.
  • Nevertheless, the break/close below the Fibonacci overlap around 1.3120 (61.8% retracement) to 1.3130 (61.8% retracement) keeps the 1.3030 (50% expansion) region on the radar, with the next area of interest coming in around 1.2970 (78.6% retracement) to 1.2980 (61.8% retracement).
  • Will keep a close eye on the RSI as a break below 30 would indicate that the bearish momentum is gathering pace.

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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.