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USD/CAD Snaps Lower Following Bank of Canada Rate Decision

USD/CAD Snaps Lower Following Bank of Canada Rate Decision

Rich Dvorak, Analyst

CANADIAN DOLLAR OUTLOOK: USD/CAD PRICE ACTION EXTENDS SLIDE IN WAKE OF BOC INTEREST RATE DECISION

  • USD/CAD falls to session lows as Loonie gains immediately after the BoC rate decision
  • Bank of Canada leaves its benchmark interest rate unchanged at 0.25% as expected
  • Canadian Dollar could face headwinds if BoC Governor Macklem jawbones the Loonie
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The Canadian Dollar is spiking to session highs following the latest Bank of Canada interest rate decision. As widely expected, BoC officials agreed to leave its overnight target rate at 0.25% and QE program unchanged at C$4-billion per week. The influx of USD/CAD selling pressure likely follows forex traders pricing out the slight potential there was for a ‘micro-cut’ to the benchmark interest rate.

Parsing the details of the Bank of Canada press release, we see the central bank now sees inflation averaging 1.6% this year and 1.7% in 2022. Also, the BoC stated that ‘considerable slack’ remains in the Canadian economy and that ‘extraordinary support’ continues to be required. On a more positive note, the Bank of Canada is projecting stronger growth forecasts later in the year despite a likely contraction in 1Q-2021 GDP. This is expected to correspond with an uptick in consumption as coronavirus restrictions ease start to ease in February and business confidence improves.

USD/CAD PRICE CHART: 15-MINUTE TIME FRAME (19 JAN TO 20 JAN 2021)

USDCAD Price Chart Canadian Dollar Reaction to Bank of Canada rate decision January 2021

USD/CAD price action currently trades lower by more than 100-pips intraday near the 1.2635-mark. This roughly aligns with year-to-date lows, which Canadian Dollar bears might look to defend as a potential technical support level. A close below this barrier could see USD/CAD downside extend toward 2018 swing lows around the 1.2300-handle.

USD/CAD BEARISH
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 5% -9% 0%
Weekly 21% -4% 13%
What does it mean for price action?
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Traders now await the post-BoC decision press conference led by Governor Macklem at 16:00 GMT. The head central banker has jawboned the Loonie recently with comments like “Canadian Dollar appreciation is hurting competitiveness of Canadian exports in the US market.” Doubling down on remarks like this could pose a headwind to the latest stretch of Canadian Dollar strength and perhaps enable USD/CAD price action to claw back some downside.

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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