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USD/CAD Outlook: Failure to Test April Low Warns of Range Bound Prices

USD/CAD Outlook: Failure to Test April Low Warns of Range Bound Prices

David Song, Strategist

Canadian Dollar Talking Points

USD/CAD trades near the monthly low (1.3866) following the limited reaction to Canada’s Consumer Price Index (CPI), but the exchange rate may face range bound conditions as the decline from earlier this week stalls ahead of the April low (1.3850).

USD/CAD Outlook: Failure to Test April Low Warns of Range Bound Prices

USD/CAD appears to be stuck in a narrow range even though the headline reading for Canada inflation contracts for the first time since 2009, but the economic shock from COVID-19 may force the Bank of Canada (BoC) to further support the economy as Deputy Governor Timothy Lane warns that the coronavirus is “likely to result in damage to Canada’s productive capacity that may be profound and long-lasting.”

Mr. Lane argues that “the pandemic itself could also result in structural changes in the economy” as travel bans and social distancing measures remain in place, with the official going onto say that “we are likely to emerge from the shutdown with both demand and supply weaker than before.”

In turn, the BoC may continue to endorse a dovish forward guidance at its next meeting on June 3 as officials project “Canada’s gross domestic product to plunge anywhere between 15 and 30 percent from its level in late 2019,” and the central bank under Tiff Macklem may implement more non-standard measures over the coming months as the “Governing Council stands ready to adjust the scale or duration of its programs if necessary.”

With that said, the Canadian Dollar may face headwinds throughout 2020 as the BoC keeps the door open to deploy more unconventional tools, and the broader outlook for USD/CAD remains constructive as the exchange rate breaks out of the descending channel from earlier this year.

However, USD/CAD may continue to consolidate in May as the decline from earlier this week stalls ahead of the April low (1.3850).

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USD/CAD Rate Daily Chart

Image of 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).
  • However, recent price action warns of range bound conditions as the break of the descending channel formation failed to produce a test of the April high (1.4298), with the recent decline in USD/CAD stalling ahead of the April low (1.3850).
  • In turn, USD/CAD may trade within a more defined, with a move above the Fibonacci overlap around 1.4010 (38.2% retracement) to 1.4040 (23.6% retracement) bringing the 1.4130 (100% expansion) to 1.4150 (161.8% expansion) region on the radar as it largely lines up with the May high (1.4173).
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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.