USD/CAD Breaking News: Hawkish Surprise as Bank of Canada Holds Rates Steady

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USD/CAD Analysis

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END OF QE! RATE HIKE COULD COME SOONER THAN FORECASTED?

The Bank of Canada decided to hold rates constant at 0.25% which is in line with market expectations. Within the Monetary Policy report (MPR), inflation is projected to stay above the 1% – 3% headline inflation range – which was considered more transitory in the previous report. Driving CAD strength post announcement is the signal to potentially hike rates earlier than originally forecasted while ending quantitative easing.

bank of canada rate decision

Source: DailyFX Economic Calendar

CANADA’S FUNDAMENTAL BACKDROP

The table below shows the expected target rates going out to October 2022. We can see markets are anticipating rate hikes around April 2022 which is far sooner than previously forecasted. This being said, Bank of Canada’s Tiff Macklem has stated that the central bank will only look to hike rates once the economic recovery is complete.

BANK OF CANADA EXPECTED TARGET RATES

canada expected target rate

Source: Refinitiv

The graphic below highlights the improving economic situation withing Canada’s labour market which could mean a quicker pace of reducing monetary and fiscal support should this trend continue to combat inflation concerns.

CANADIAN CHANGE IN NON-FARM PAYROLLS

canada employment

Source: ADP

From a currency perspective, the comparative chart below shows significant CAD strength (green) despite rising inflation (yellow). The orange line represents the Refinitiv Canada oil and gas index which is demonstrative of the exceptional rise in oil and gas prices of recent. The Canadian Dollar (CAD) has a high positive correlation (inverse correlation to USD/CAD) to oil prices hence the recent uptick in CAD strength along with a relatively subdued US Dollar.

USD/CAD VS CANADAIAN CPI VS REFINTIV CANADA OIL & GAS INDEX

oil vs usd/cad vs canada cpi

Chart prepared by Warren Venketas, Refinitiv

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USD/CAD DAILY CHART

USD/CAD daily chart

Chart prepared by Warren Venketas, IG

The daily USD/CAD chart above shows the rate of CAD appreciation against the greenback since the end of September 2021. This has since dissipated slightly as oil prices slacken off but this may only be temporary as suggested by the technical pattern currently in formation – rising wedge (yellow).

This is generally considered as a bearish continuation pattern should prices break below wedge support. It will be wise to confirm the break as a false breakout is possible. A daily candle close below may confirm the short-term trajectory to the downside however, CAD strength is reaching an exhaustive zone.

The possibility for a reversal to the upside is also a characteristic of the rising wedge although fundamentally bearish. In this case, a confirmed break (candle close) above wedge resistance could be a signal to look at subsequent resistance targets.

The Relative Strength Indicator (RSI) has recently moved out of oversold territory but still remains below the 50 level which favors downside momentum.

Key resistance levels:

Key support levels:

  • 1.2400
  • 1.2288
  • 1.2000

IG CLIENT SENTIMENT DATA REVEALS NEUTRAL BIAS

IGCS shows retail traders are currently prominently long on USD/CAD, with 76% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment, and the fact traders are net-long is suggestive of a sustained bearish outlook however, with a higher net change in short positions relative to long positions by retail traders, the outlook is of a mixed disposition.

— Written by Warren Venketas for DailyFX.com

Contact and follow Warren on Twitter: @WVenketas

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