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Canadian Dollar Rate Forecast: BoC gets Bullish on Economy, Holds Rates

Canadian Dollar Rate Forecast: BoC gets Bullish on Economy, Holds Rates

Tyler Yell, CMT, Currency Strategist

Canadian Dollar Rate Forecast Key Takeaways:

  • USD/CAD Price Forecast: CAD remains in Bullish pattern vs. USD with scope to 1.24
  • Bank of Canada holds rates as traders price in ~44% chance of a hike at May 30 meeting
  • IG UK Client Sentiment Highlight: Retail long activity jumps, bias for downside emerges

The Canadian Dollar paused its gains as the Bank of Canada rate decision had something for everyone. The BoC held rates as expected, but their revised economic outlook showed that Governor Poloz sees room for more rate hikes down the road.

Overall, the Canadian Dollar remains within a bullish pattern against the US Dollar with a scope to trade through the February 14 low of 1.2491 toward the downside 1 Std. Deviation move of the 12-month trailing price toward 1.2461.

See the strength arising in Commodity FX in our most recent FX Overbought/ Oversold Report

BoC Set Up Scene For Future Rate Hikes

Stephen Poloz, head of the Bank of Canada said that the bank was not worried that a better-than-expected growth outlook would ignite inflation. Central bankers have been infamous for misinterpreting the building blocks for aggressive inflation and the Canadian central bank looks to be setting themselves up in a similar fashion.

In other words, they’re saying the scene is set for inflation, which typically causes central banks to raise rates that strengthen the currency, but they don’t see inflation getting out of hand. Some see this as a ‘Goldilocks’ or that the Canadian economy is sitting in the sweet spot of the business cycle thanks to growing demand without profit-margin erasing inflation.

Updated BoC Forecast for Potential Growth

Canadian Dollar Rate Forecast: BoC gets Bullish on Economy, Holds Rates

Source: Bank of Canada

The key comments from the Bank of Canada were as follows, “Higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target.”

Unlock our Q2 forecast to learn what will drive trends for the US Dollar

Technical Focus on the Canadian Dollar – USD/CAD Tests 200-DMA, Targets 1.24

On Wednesday, the Canadian Dollar consolidated gains within a bullish pattern (downtrend in USD/CAD.) The spot price moved to 1.2600 that aligns with the 200-DMA at 1.2622. Traders appear to see the caution BoC as offering better entry levels for CAD bulls whereas others see this as a setback for the Canadian Dollar that could pave the way for an eventual move on USD/CAD back toward 1.29/30. I remain firmly in the former camp in that anticipated CAD strength to remain.

The risk for the bulls is that the Overnight Index Swaps market pricing in of future hawkish BoC action is some of the more bullish in the world, and repricing of the OIS market could see CAD weaken further.

Resistance on the recent move lower can be found at the April 10 high at 1.2709 and lower at the 200-DMA at 1.2622 that was below Wednesday's snap-back high of 1.2635.

Continuation of the move lower would be confirmed on a breakdown below the April 17 low a 1.2528.

USD/CAD Daily Chart: Set for Breakdown Toward 1.2400/2250

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Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

Looking at the chart above, it is fair to say that we’re at a bit of juncture. In short, the price stall on the move lower took place at the 61.8% of the February-March range at 1.2584. At the same time, the lagging line per Ichimoku paused at the move into the cloud. However, an eventual breakdown through this level, if it takes place, would likely result in an eventual move to the February 16 low of 1.2450 followed by the February low of 1.2250.

Not familiar with Fibonacci analysis, check out this insightful article

Valuable Insight from IG Client Positioning for USD/CAD: Retail buying activity jumps, biased lower

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Data source: IG Client Positioning

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDCAD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USDCAD price trend may soon reverse higher despite the fact traders remain net-long.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

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