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USD/CAD Rate Tracks October Range Amid Failure to Test 2019 Low

USD/CAD Rate Tracks October Range Amid Failure to Test 2019 Low

David Song,
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Canadian Dollar Talking Points

USD/CAD has changed course after the Bank of Canada (BoC) altered its monetary policy outlook, and the exchange rate may continue to retrace the decline from the previous month amid the failed attempt to test the 2019 low (1.3016).

USD/CAD Rate Tracks October Range Amid Failure to Test 2019 Low

USD/CAD approaches the October high (1.3348) even though the BoC kept the benchmark interest rate on hold as the central bank appears to be on track to follow its major counterparts.

Image of BoC interest rate decision

The BoC changed its tone as the central bank now expects growth “to slow in the second half of this year to a rate below its potential,” and it seems as though Governor Stephen Poloz and Co. will continue to alter the forward guidance for monetary policy as the “Governing Council is mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist.”

The comments suggest the BoC is now on course to implement lower interest rates as “Governing Council considered whether the downside risks to the Canadian economy were sufficient at this time to warrant a more accommodative monetary policy as a form of insurance.”

In contrast, the Federal Reserve seems to be moving away from its rate easing cycle as Chairman Jerome Powell tells US lawmakers that “the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth.”

In turn, USD/CAD may exhibit a more bullish behavior ahead of the BoC’s last meeting on December 4 as a growing number of Federal Reserve officials tame speculation for another rate cut in 2019.

Image of Fed Fund futures

In fact, Fed Fund futures show a greater than 80% probability that the Fed will keep the benchmark interest rate on hold at its first meeting in 2020 as the central bank expects the three consecutive rate cuts to “provide significant support for the economy.”

As a result, the shift in central bank rhetoric may keep USD/CAD afloat, with the failed attempt to test the 2019 low (1.3016) bringing the October high (1.3348) on the radar.

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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 amid the break of the February-low (1.3068), with the exchange rate trading to a fresh yearly low (1.3016) in July.
  • 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 the exchange rate largely tracking sideways as it remains stuck in the range bounce price action from the third quarter.
  • With that said, the failed attempt to the 2019 low (1.3016) has pushed USD/CAD back above the Fibonacci overlap around 1.3120 (61.8% retracement) to 1.3130 (61.8% retracement), with the break/close above 1.3220 (50% retracement) bringing the 1.3280 (23.6% expansion) to 1.3330 (38.2% retracement) on the radar.
  • The October high (1.3348) comes up next followed by the high (1.3380) set in September.
  • Will keep a close eye on the Relative Strength Index (RSI) as it approaches overbought territory, with a break above 70 raising the scope for a further appreciation in USD/CAD as the bullish momentum gathers 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.