Canadian Dollar Talking Points
USD/CAD consolidates after failing to test the June high (1.3801), but the reversal from the March low (1.3315) may continue to evolve over the coming day as the Relative Strength Index (RSI) breaks out of the bearish formation carried over from May.
USD/CAD Rate Reversal from March Low Keeps June High on Radar
USD/CAD slipped to a fresh weekly low (1.3546) as the monthly update to Canada’s Gross Domestic Product (GDP) report showed a smaller-than-expected contraction, with the growth rate narrowing 11.6% in April versus forecasts for a 12.2% decline.
The development suggests that the economic shock from COVID-19 is less severe than the worst case scenario, but it remains to be seen if the data print will influence the monetary policy outlook as Bank of Canada (BoC) Governor Tiff Macklem rules out a V-shape recovery.
In turn, the BoC may rely on its balance sheet to support the Canadian economy as “the policy rate is now at its effective lower bound,” and the central bank may come under increased pressure to deploy more unconventional tools as Fitch Ratings downgrades Canada’s Long-Term Foreign Currency Issuer Default Rating (IDR) to ‘AA+’ from ‘AAA.’
With that said, the BoC may continue to endorse a dovish forward guidance as the central bank pledges to conduct “large-scale asset purchases until the economic recovery is well underway,” but it seems as though Governor Macklem and Co. are in no rush to provide additional monetary support as “any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target.”
As a result, the BoC may stick to the sidelines at the next interest rate decision on July 15 as officials “expect growth to resume in the third quarter,” and the update to the Monetary Policy Report (MPR) may reveal a gradual shift in the forward guidance for monetary policy as “the Bank is reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations.”
Until then, the reversal from the March low (1.3315) may continue to evolve as USD/CAD trades within an ascending channel, while the Relative Strength Index (RSI) clears trendline resistance and breaks out of the bearish formation carried over from May.
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USD/CAD Rate Daily Chart
Source: Trading View
- Keep in mind, the USD/CAD rally at the start of 2020 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, the pullback from the yearly high (1.4667) unravels after filling the price gap from March, and the reversal from the March low (1.3315) may continue to evolve as USD/CAD carves an ascending channel, while the Relative Strength Index (RSI) clears trendline resistance and breaks out of the bearish formation carried over from May.
- USD/CAD struggles to extend the series of lower highs and lows from earlier this week after failing to push the 1.3510 (38.2% expansion) to 1.3540 (23.6% retracement) region, with a move above the 1.3610 (61.8% retracement) to 1.3660 (78.6% expansion) region bringing the 1.3720 (78.6% expansion) area back on the radar.
- Need a break/close above 1.3720 (78.6% expansion) to open up the Fibonacci overlap around 1.3810 (50% retracement) to 1.3830 (100% expansion), which largely lines up with the June high (1.3801), with the next area of interest coming in around 1.4010 (38.2% retracement) to 1.4040 (23.6% retracement).
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
