USD CAD at risk of extending plunge on central bank shifts

Wednesday’s anticipated 25-basis-point interest rate hike by the Bank of Canada (BoC) prompted an expected sharp surge for the Canadian dollar. Combined with a struggling US dollar that has been weighed down by an increasingly dovish Federal Reserve, this Canadian dollar surge prompted a USD/CAD plunge below major previous support at the key 1.2800 level. The currency pair stabilized on Thursday, trading within a tight range, but is at risk of further extending its plunge on shifting perceptions of both the Fed and BoC.

The Bank of Canada raised its overnight rate to 0.75% on Wednesday, the first interest rate hike in seven years. In addition to the rate hike, however, the central bank also issued a hawkish policy statement that hinted at further hikes potentially to come. This hawkish turn for the BoC coincided with a more dovish turn for Federal Reserve officials, including Fed Chair Janet Yellen in congressional testimony, who have recently begun indicating a slower pace of tightening and fewer rate hikes than previously expected.

These very prominent shifts by the two central banks in opposite directions drove the sharp USD/CAD move to the downside, and the implications of these shifts are not likely to go away any time soon. An increasingly hawkish Bank of Canada and dovish Fed have the potential to extend USD/CAD’s breakdown significantly below 1.2800. In this event, the sharp two-month downtrend for the currency pair has its next major downside target at the 1.2650 support level, followed further to the downside by the key 1.2500 psychological support target.