Canadian Dollar Outlook: USD/CAD Eyes February Low with BoC on Tap

Canadian Dollar Talking Points

USD/CAD fills the price gap from the start of the week as there appears to be a recovery in investor confidence, and the Bank of Canada (BoC) interest rate decision may push the exchange rate toward the February low (1.2636) as the central bank is expected to deliver a 25bp rate hike.

Canadian Dollar Outlook: USD/CAD Eyes February Low with BoC on Tap

USD/CAD clears last week’s low (1.2681) amid a rise in global equity prices, but the growing response by the US and its allies to the Russia-Ukraine war may influence the exchange rate as it disrupts the outlook for global growth.

Nevertheless, the BoC rate decision may fuel the recent series of lower highs and lows in USD/CAD as the central bank is widely anticipated to increase the benchmark interest rate to 0.50% from 0.25%, and an adjust in the forward guidance for monetary policy may push the exchange rate toward the February low (1.2636) if Governor Tiff Macklem and Co. prepare Canadian households and businesses for a series of rate hikes.

However, the BoC may carry out a gradual approach in normalizing monetary policy as “COVID-19 continues to affect economic activity unevenly across sectors,” and a dovish rate hike may prop up USD/CAD as the Federal Reserve looks to implement higher interest rates while unloading its balance sheet in 2022.

As a result, USD/CAD may track the February range ahead of the Federal Open Market Committee (FOMC) rate decision on March 16 as market participants brace for a material change in the forward guidance for US monetary policy, while the tile in retail sentiment looks poised to persist as traders have been net-long the pair since late-December.

The IG Client Sentiment report shows 60.77% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 1.55 to 1.

The number of traders net-long is 5.26% lower than yesterday and 11.22% lower from last week, while the number of traders net-short is 21.22% higher than yesterday and 24.61% lower from last week. The rise in net-long position comes as USD/CAD clears last week’s low (1.2681), while the rise in net-short interest has helped to alleviate the crowding behavior as 61.13% of traders were net-long the pair last week.

With that said, the BoC rate decision may push USD/CAD towards the February low (1.2636) as the central bank is expected to switch gears, but a dovish rate hike may keep the exchange rate within a defined range as the Fed appears to be on track to normalize monetary policy at a faster pace than its Canadian counterpart.

USD/CAD Rate Daily Chart

Source: Trading View

• Keep in mind, USD/CAD traded to a fresh 2021 high (1.2964) in December even as the Relative Strength Index (RSI) diverged with price, with the exchange rate clearing the 2022 opening range in February as it traded to a fresh yearly high (1.2878).
• However, USD/CAD carves a series of lower highs and lows after failing to break/close above the Fibonacci overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion), with the exchange rate approaching the 1.2620 (50% retracement) to 1.2650 (78.6% expansion) region as it gives back the advance from the February low (1.2636).
• A break/close below the 1.2620 (50% retracement) to 1.2650 (78.6% expansion) region may push USD/CAD towards the 200-Day SMA (1.2558), with the next area of interest coming in around 1.2510 (78.6% expansion).
• At the same time, lack of momentum to test the February low (1.2636) may push USD/CAD back towards the 1.2770 (38.2% expansion) area, with the exchange rate poised for fresh yearly highs on a break/close above the overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong