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Canadian Dollar Surges as BOC Holds Rates - Next Levels for USD/CAD

Canadian Dollar Surges as BOC Holds Rates - Next Levels for USD/CAD

2019-12-04 15:47:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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December BOC Meeting Review:

  • The Bank of Canada kept its main interest rate on hold, as expected.
  • USD/CAD rates have broken their uptrend from the October low, suggesting that the broader range in place since early-July will remain intact.
  • According to the IG Client Sentiment Index, USD/CAD no longer has a bullish outlook.

Looking for longer-term forecasts on the Canadian Dollar? Check out the DailyFX Trading Guides.

BOC Holds Main Rate at 1.75%; Global Economy Stabilizing

The Bank of Canada kept interest rates on hold today, in-line with the broad market consensus. Noting that the Canadian economy has proved resilient despite the recent expected and realized slowdown in Q3’19 Canada GDP, the BOC determined that it was “appropriate” to maintain its main interest rate at 1.75%.

The BOC made clear that it’s been the resiliency of the domestic Canadian economy that has allowed policymakers to keep rates on hold, noting that their October projection for global growth “appears to be intact.” Indeed, “waning recession concerns” are supporting financial markets.

BOC Looking at Fiscal Policy, Impact of Canadian Dollar

The Bank of Canada made note that it anticipates inflation to remain around 2% for the next few years, a sign that the Canadian economy is “near capacity.” With Q3’19 business investment outperforming even the BOC’s optimistic expectations, policymakers are now taking the position that fiscal spending plans in early-2020 will factor into the next BOC rate decision.

Rate Cut Expectations Ease After December BOC Meeting

With the view that the global economy is weathering the US-China trade war, BOC policymakers appear to be pushing back on the market’s perspective that more easing is coming shortly. Prior to the October BOC meeting, there were no interest rate moves discounted over the following 12-months. At their peak in November, rates markets were pricing in a 25-bps rate cut from the BOC as early as April 2020.

Bank of Canada Interest Rate Expectations (December 4, 2019) (Table 1)

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According to Canada overnight index swaps, the chance of a BOC rate cut in early-2020 has fallen in the wake of the December BOC meeting. Last week, there was a 51% chance of a 25-bps rate cut at the April 2020 BOC meeting. After the December BOC meeting, rates markets have pushed back the timing of the next cut from April 2020 to October 2020 (52%).

USD/CAD Rate Technical Analysis: 1-minute Chart (December 4, 2019 Intraday) (Chart 1)

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Following the December BOC meeting and comments from policymakers, the Canadian Dollar surged across the board. USD/CAD rates fell from 1.3277 ahead of the December BOC meeting results to as low as 1.3222 thereafter; at the time this report was written, the spot USD/CAD rate was 1.3227.

USD/CAD Rate Technical Analysis: Daily Chart (December 2018 to December 2019) (Chart 2)

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USD/CAD rates have carved out a sideways trading range since early-July between 1.3015 and 1.3383, and the latest price action developments suggest that the range will continue to hold. After trading higher towards range resistance throughout November, USD/CAD rates have seen their short-term flag consolidation yield a downside break. Accordingly, the uptrend from the low ahead of the October BOC meeting has been broken.

USD/CAD rates may now see a return towards range lows, particularly if BOC rate expectations are able to stay depressed relative to the Federal Reserve’s own interest rate expectations. USD/CAD rates are below the daily 5-, 8-, 13-, and 21-EMA envelope, although not in bearish sequential order. Daily MACD is trending lower as are Slow Stochastics, however, both indicators remain in bullish territory.

While the path for least resistance may be lower for USD/CAD at present time, traders may want to be patient within the range before any breakout or momentum trading strategies are deployed. As such, if USD/CAD rates continue to pullback, traders should look to the November 19 low at 1.3190 as the key level of short-term support.

IG Client Sentiment Index: USD/CAD Rate Forecast (December 4, 2019) (Chart 3)

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USD/CAD: Retail trader data shows 30.13% of traders are net-long with the ratio of traders short to long at 2.32 to 1. The number of traders net-long is 3.79% lower than yesterday and 23.30% higher from last week, while the number of traders net-short is 0.17% lower than yesterday and 2.00% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/CAD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.

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Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

View our long-term forecasts with the DailyFX Trading Guides

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