Canadian Dollar Talking Points
USD/CAD retains the advance from earlier this week despite the reaction to Canada’s Consumer Price Index (CPI), and fresh comments coming out of the Bank of Canada (BoC) may spur a run at the October high (1.3348) as the central bank alters the outlook for monetary policy.
USD/CAD Rate Approaches October High Ahead of BoC Fireside Chat
Signs of sticky price growth sparked a bullish reaction in the Canadian Dollar as the headline reading for inflation held steady at 1.9% in October. However, the move was short lived, with USD/CAD pushing to a fresh weekly high (1.3328) ahead of the fireside chat with BoC Governor Stephen Poloz.
The development may encourage the BoC to keep the benchmark interest rate on hold at its last meeting for 2019 as “the Bank expects inflation to track close to the 2 percent target over the projection horizon,” but the central bank appears to be on track to follow its major counterparts as Governor Poloz and Co. anticipate the Canadian economy “to slow in the second half of this year to a rate below its potential.”
In turn, the BoC may prepare households and businesses for an imminent rate cut as the “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.”
The remarks suggest the BoC will take a preemptive approach in managing 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.”
As a result, a batch of dovish comments from Governor Poloz is likely to drag on the Canadian Dollar, and the central bank may continue to change its tone at the next meeting on December 4 amid the weakening outlook for global growth.
With that said, the Canadian Dollar may exhibit a more bearish behavior over the remainder of the week, and the shift in the BoC’s forward guidance may keep USD/CAD afloat especially as the Federal Reserve appears to be moving away from its rate easing cycle.
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USD/CAD Rate Daily Chart
Source: Trading View
- Keep in mind, 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.
- At the same time, the flattening slopes in the 50-Day (1.3215) and 200-Day SMA (1.3275) warn of range-bound conditions as the moving averages appear to on their way to converge with one another.
- More recently, USD/CAD has pushed back above the 1.3220 (50% retracement) region following the failed attempt to test the 2019 low (1.3016), with the October high (1.3348) now on the radar.
- Need a break/close above the Fibonacci overlap around 1.3280 (23.6% expansion) to 1.3330 (38.2% retracement) to open up the next topside hurdle around 1.3410 (38.2% expansion) to 1.3420 (78.6% retracement).
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--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong.
