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USD/CAD Rebound Unravels as Fed Prepares to Purchase Corporate Bonds

USD/CAD Rebound Unravels as Fed Prepares to Purchase Corporate Bonds

David Song,
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Canadian Dollar Talking Points

USD/CAD pulls back from the weekly high (1.3686) as the Federal Reserve updates the Secondary Market Corporate Credit Facility (SMCCF) ahead of the semi-annual testimony with Chairman Jerome Powell, but recent developments in the Relative Strength Index (RSI) warns of a larger correction as the indicator bounces back from oversold territory and offers a textbook buy signal.

USD/CAD Rebound Stalls as Fed Prepares to Purchase Corporate Bonds

USD/CAD struggle to retain the advance following the Federal Open Market Committee (FOMC) interest rate decision as the central bank announces that the Secondary Market Corporate Credit Facility (SMCCF) “will purchase corporate bonds to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds.”

More updates are likely to emerge as the Fed expands the scope of the Main Street Lending Program “to allow more small and medium-sized businesses to be able to receive support,” but it remains to be seen if the FOMC will deploy more non-standard measures over the coming months as the central bank pledges to “evaluate our monetary policy stance and communications as more information about the trajectory of the economy becomes available.”

In turn, Chairman Powell may strike a less dovish tone in front of US lawmakers as the update to the Summary of Economic Projections (SEP) show “a general expectation of an economic recovery beginning in the second half of this year,” and the central bank head may emphasize that “when the time comes, after the crisis has passed, we will put these emergency tools back in the toolbox” as the balance sheet climbs above $7.1 trillion in June.

Image of DailyFX economic calendar for Canada

At the same time, the Bank of Canada (BoC) may follow a similar path as the update to Canada’s Consumer Price Index (CPI) is expected to show the headline reading for inflation holding flat in May after contracting 0.2% the month prior, and Governor Tiff Macklem and Co. may adjust the forward guidance at the next meeting on July 15 as “the Bank expects the economy to resume growth in the third quarter.”

With that said, the BoC may continue to rule out a negative interest rate policy as “the Bank’s programs to improve market function are having their intended effect,” but recent price action in USD/CAD warns of a larger correction as the exchange rate reverses at the March low (1.3315), while the Relative Strength Index (RSI) bounces back from oversold territory and offers a textbook buy signal.

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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, the pullback from the yearly high (1.4667) may continue to evolve as USD/CAD takes out the April low (1.3850),and the exchange rate may continue to exhibit a bearish behavior in June as it fills the price gap from March.
  • The Relative Strength Index (RSI) highlights a similar dynamic as the oscillator continues to track the downward trend from May, but the indicator may offer a textbook buy signal over the coming days as it appears to be bouncing back from oversold territory.
  • Nevertheless, the break/close below the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region opens up the Fibonacci overlap around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement), which largely lines up with the March low (1.3315), with the next area of interest coming in around 1.3250 (23.6% expansion).
  • Nevertheless, lack of momentum to hold below the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region may push USD/CAD back towards the overlap around 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement), with the next area of interest coming in around 1.3510 (38.2% expansion) to 1.3540 (23.6% retracement).
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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.