USD/CAD tentatively breaches critical price level on BoC comments
James Chen, CMT September 27, 2017 1:23 PM
The Canadian dollar has not performed well against the rebounding and recovering US dollar within the past three weeks. And surging crude oil prices this month have not been able to help the typically energy-linked Canadian dollar from sliding sharply against the greenback. This CAD weakness against the USD in the past few weeks can be readily seen on the daily chart of USD/CAD, which shows the currency pair rising from more than a two-year-low around 1.2060 in early September up to its current position fluctuating above and around the key 1.2400-area price level.
The recent precipitous 4-month USD/CAD plunge from early May to early September was driven in part by the increasingly sharp contrast between a hawkish Bank of Canada and a hesitant US Federal Reserve that had seemingly become more dovish throughout much of this year. This dynamic shifted last week when the Fed issued its latest statement essentially affirming its objective for normalizing monetary policy and raising interest rates further. This provided a boost for the previously battered and well-oversold US dollar, which had already begun to rise off its recent multi-year lows.
Despite Fed Chair Janet Yellen’s warnings on Tuesday that the Fed may have “misjudged” labor market conditions and inflation expectations, which could ultimately warrant a slower rate of policy normalization, the US dollar remained well-supported and resumed its rise on Wednesday. Market expectations of a December rate hike by the Fed stayed well above 70% after Yellen’s comments, and even rose further to break above 80% on Wednesday.
On the Canadian dollar side, the currency took a further hit on Wednesday after Bank of Canada Governor Stephen Poloz stated in a speech that there would be “no predetermined path for interest rates,” and then went on to state that “monetary policy will be particularly data-dependent in these circumstances and, as always, we could still be surprised in either direction.” These statements come after the Bank of Canada recently established itself as one of the most hawkish major central banks when it raised interest rates back-to-back in July and September. Poloz’s Wednesday remarks appeared to back off from this hawkish stance.
Given this dovish-leaning tone from Poloz, if expectations continue to run high with respect to interest rate increases from the Fed, USD/CAD could be set to rise further. From a technical perspective, as noted, USD/CAD has tentatively broken above key resistance around 1.2400, which also represents previous support for the late-July lows. With any further follow-through to the upside and sustained rise above 1.2400 on a divergent shift in expectations between the Fed and BoC, near-term upside targets are at the 1.2500 and 1.2650 resistance levels.
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.