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Canadian Dollar May Rise on Firming Market Sentiment, Hesitant BoC

Canadian Dollar May Rise on Firming Market Sentiment, Hesitant BoC

Daniel Moss, Analyst

Canadian Dollar, Coronavirus, BoC, CAD/JPY, USD/CAD – Talking Points:

  • The Bank of Canada’s resistance to more aggressive easing may continue to buoy CAD.
  • USD/CAD rates eyeing fresh yearly lows after collapsing through support.
  • CAD/JPY gearing up to test key inflection point.

CAD to Push Higher as BoC Focus on QE

The Canadian Dollar may continue to push higher despite a significant rise in local coronavirus infections, as the Bank of Canada leans away from negative rates and focuses on adjusting its Quantitative Easing program.

The BoC opted to maintain its target for the overnight rate “at the effective lower bound of 0.25%” and recalibrated its QE program to “shift purchases toward longer-term bonds” at its monetary policy meeting in October.

Governor Tiff Macklem and the Governing Council also moved to gradually reduce the program’s total purchases to “at least $4 billion a week”, adding that “with these combined adjustments, the QE program is providing at least as much monetary stimulus as before”.

As noted in previous reports, Macklem has stated his concerns regarding the impact of additional monetary easing, warning that “as much as bold policy response is needed, it will inevitably make the economy and financial system more vulnerable to economic shocks down the road”.

Canada Ivey PMI

Canadian Dollar May Rise on Firming Market Sentiment, Hesitant BoC

Source – TradingEconomics

The Governor’s statement, in tandem with the central bank’s recent policy adjustments, could be an indication that Canadian policymakers may resist easing further in the absence of a notable deterioration in economic data.

Indeed, recent economic releases may justify the BoC’s hesitance to use more aggressive easing measures, as the Ivey PMI release for October – a measure of business confidence – increased to 54.5 and beat market expectations of a 51.5 print.

Therefore, market participants may discount the possibility that the central bank will provide further accommodation in the near term and in turn put a premium on the cyclically-sensitive Canadian Dollar.

Covid-19 Restrictions Threatening Economic Recovery

It must be noted however, that the imposition of tighter Covid-19 restrictions in several Canadian provinces could sway the central bank’s stance, as Ontario Premier Doug Ford stresses that “if the numbers get totally out of control, I won’t hesitate to do what it takes to protect the health and safety of the people”.

With the 14-day moving average tracking infections hovering at more than double the levels seen in April, Prime Minister Justin Trudeau has urged provincial premiers and mayors not to ease public-health vigilance “because they feel pressure not to shut down businesses or slow down our economy”.

That being said, the Oxford Government Response Stringency Index has held unchanged since early September, perhaps reflecting an unwillingness of regional authorities to tighten restrictions.

Canadian Dollar May Rise on Firming Market Sentiment, Hesitant BoC

Sources – University of Oxford, Apple Mobility Data

High-frequency mobility data has also stabilized over the last 6 weeks, with both driving and walking trends holding above the pre-coronavirus baseline. This suggests not only that restrictions have remained relatively unchanged, but also hints that residents could be becoming desensitised to the marked increase in infections.

Nevertheless, investors should continue to monitor local health developments and the response from regional authorities, with the imposition of stricter measures probably limiting CAD’s upside against its haven-associated counterparts.

USD/CAD Daily Chart – October Low Capping Upside

Canadian Dollar May Rise on Firming Market Sentiment, Hesitant BoC

USD/CAD daily chart created using TradingView

From a technical perspective, USD/CAD rates are poised to continue moving lower, as price continues to track within the confines of a Descending Channel.

Although bearish RSI divergence hints at a short-term correction, further losses appear in the offing if key resistance at the October 12 low (1.3101) remains intact.

A daily close below the 50% Fibonacci (1.3039) looks likely to open the door for a challenge of the support range at 1.2930 – 1.2950, with a convincing break below bringing the October 2018 low (1.2783) into play.

Alternatively, hurdling the psychologically imposing 1.31 mark could generate a probe of the trend-defining 50-day moving average (1.3197) and channel resistance.

Canadian Dollar May Rise on Firming Market Sentiment, Hesitant BoC

Retail trader data shows 83.40% of traders are net-long with the ratio of traders long to short at 5.02 to 1. The number of traders net-long is 15.64% higher than yesterday and 75.13% higher from last week, while the number of traders net-short is 6.79% lower than yesterday and 27.95% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bearish contrarian trading bias.

CAD/JPY Daily Chart – Eyeing August High Resistance

Canadian Dollar May Rise on Firming Market Sentiment, Hesitant BoC

CAD/JPY daily chart created using TradingView

A spirited CAD/JPY recovery propelled the currency pair back above the sentiment-defining 200-DMA (79.72) and just pips away from August high resistance (81.58).

This may set the stage for CAD/JPY to climb to its highest levels since June, if support at the October 9 daily close (80.50) holds firm.

Ultimately, a move above the June high (81.91) is needed to signal a resumption of the uptrend extending from the March nadir and clear a path towards the 61.8% Fibonacci (83.74).

Conversely, breaching key support at the July high (80.14) could intensify selling pressure and drag price back towards the 78.6% Fibonacci (78.47).

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.