Canadian Dollar Talking Points
USD/CAD appears to be stuck in a narrow range ahead of the update to Canada’s Consumer Price Index (CPI), but the exchange rate may make a run at the monthly high (1.4298) as it breaks out of the downward trending channel carried over from the previous month.
USD/CAD Rate Breakout Brings Monthly High on Radar
USD/CAD struggles to clear last week’s high (1.4182) despite the collapse in the price of oil, but fresh data prints coming out of Canada may spark a bullish reaction in the exchange rate as the headline reading for inflation is expected to hit its lowest reading since 2017.
Canada’s CPI is projected to narrow to 1.1% from 2.2% per annum in February, and the economic shock from COVID-19 may force the Bank of Canada (BoC) to deploy more non-standard tools as “the economy is also being hurt by the plunge in world oil prices.”
It seems as though the BoC will continue to rely on its balance sheet to support the Canadian economy as the Governing Council “lowered our policy interest rate three times to 0.25 percent, which we consider to be its effective lower bound,” and the central bank may continue to push monetary policy into uncharted territory as Governor Stephen Poloz insists that “the Bank stands ready to augment the scale of any of its programs should market conditions warrant it.”
It remains to be seen if Governor Poloz will announce anything new before his term expires in June as “the economic outlook is highly conditional on how long the containment measures remain in place,” but the central bank may continue to endorse a dovish forward guidance at the next meeting on June 3 as “substantial monetary stimulus needs to be in place to lay the foundation for the post-containment economic recovery.”
In turn, USD/CAD may exhibit a bullish behavior throughout 2020 as the US Dollar benefits from the flight to safety, and the rebound from the monthly low (1.3855) may gather pace over the coming days as the exchange rate breaks out of the descending channel formation carried over from the previous month.
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USD/CAD Rate Daily Chart
Source: Trading View
- Keep in mind, the near-term rally in USD/CAD emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the yearly opening range highlighting a similar dynamic as the exchange rate failed to test the 2019 low (1.2952) during the first full week of January.
- The shift in USD/CAD behavior may persist in 2020 as the exchange rate breaks out of the range bound price action from the fourth quarter of 2019 and clears the October high (1.3383).
- With that said, USD/CAD breaks out of the downward trending channel from March following the failed attempt to test the Fibonacci overlap around 1.3810 (50% retracement) to 1.3830 (100% expansion), with the break/close above the 1.4130 (100% expansion) to 1.4140 (161.8% expansion) region bringing the monthly high (1.4298) on the radar.
- Need a break/close above the 1.4260 (23.6% retracement) area to open up the yearly high (1.4667), which largely lines up with the Fibonacci overlap around 1.4650 (261.8% expansion) to 1.4660 (78.6% retracement).
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
