USD/CAD Poised to Breakout with BOC on Tap
January 21, 2020 11:20 AM
The BOC may strike a slightly more dovish note at tomorrow’s meeting...
Heading into tomorrow’s Bank of Canada interest rate decision, traders are not expecting much in terms of tweaks to monetary policy. In fact, the market-implied odds of a rate cut are near zero, so any market reaction is more likely to hinge on the central bank’s forecasts for GDP and inflation over the coming year.
Ostensibly, the outlook for the Canadian economy has improved in recent weeks. After all, the official signing of the USMCA trade deal and the trade war “truce” between the US and China have removed a big element of uncertainty for the export-dependent sectors of Canada’s economy. Meanwhile, Canada’s big employment report earlier this month showed a stellar 35.2K net increase in employment and saw the unemployment rate drop 3 ticks to 5.6%, near its lowest levels since the mid-1970s. At the same time, CPI inflation has ticked up to a bit above 2.0%, exactly where major central banks like to see it.
Despite the relatively solid economic performance, the Canadian economy remains stuck in first gear, with annualized GDP growth printing in the 1.5%-2.0% range in each of the past six quarters. Given the lackluster headline growth and recent strength of the Canadian dollar, which is testing multi-year highs against the US dollar and other major rivals, the BOC may strike a slightly more dovish note at tomorrow’s meeting. If the central bank downgrades its outlook for growth or inflation this year, or notes that its watching the recent strength of the Canadian dollar closely, the loonie may drop against its major rivals.
Focusing on USD/CAD specifically, rates have been trapped in a tight 50-pip range between 1.3030 and 1.3080 for the past two weeks. While this recent extraordinarily tight range has not been particularly compelling for traders, it’s important to remember that volatility is cyclical, meaning that the current low-volatility conditions could set the stage for a potentially explosive move in the coming days, with this month’s BOC meeting serving as a potential catalyst for a strong move:
Source: TradingView, Gain Capital
If the BOC tacitly acknowledges the downside risks to the Canadian economy as we outlined above, USD/CAD could rally through near-term resistance at 1.3080 and potentially continue all the way up toward the late December highs in the 1.3180 zone. Meanwhile, a more optimistic outlook from the BOC could boost the loonie and drive USD/CAD down to retest its early January lows near 1.2960.
One way or another, USD/CAD traders should keep a close eye on tomorrow’s release, especially given the tepid trading conditions of late!
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.