Despite continued weakness in the US dollar on Thursday, USD/CAD was stuck in a relatively tight range due to hesitancy and uncertainty regarding the Canadian dollar after the Bank of Canada’s rate hike and statement on Wednesday. Though the central bank raised its overnight rate by 25 basis points to 1.25%, as widely expected, cautionary statements regarding the pace of future tightening weighed on the Canadian dollar.
The Bank of Canada portrayed strong confidence in the Canadian economy and even indicated that more interest rates may likely be on the horizon. At the same time, however, central bank policymakers also cautioned that they were in no hurry to normalize interest rates, and that continued monetary policy accommodation would likely still be necessary for the time being. Key among the BoC’s worries was the future of NAFTA. BoC officials stated that “uncertainty surrounding the future of the North American Free Trade Agreement is clouding the economic outlook,” as concerns over the upcoming NAFTA talks weighed heavily on the central bank’s stance.
USD/CAD in the aftermath of the BoC decision and statement displayed the indecision caused by the central bank’s mixed messages. As of Thursday, this indecision has prompted the currency pair to range-trade in a struggle for direction even as the US dollar continued to suffer from pronounced bearish sentiment. While USD/CAD’s movement will depend to a large extent on how NAFTA talks proceed, the trend for the currency pair continues to be strongly bearish, particularly in light of the exceptional weakness in the US dollar that has prevailed for the past few weeks and months. Any continuation of that weakness is likely to pressure USD/CAD towards a breakdown below key support around the 1.2400 price area. Such a breakdown could prompt a resumption of the bearish trend and potentially a continued slide for USD/CAD down towards the next key support target around the 1.2200 level.