USD/CAD Outlook Hinges on Bank of Canada (BoC) Forward Guidance

Canadian Dollar Talking Points

USD/CAD trades to a fresh monthly low (1.2471) following the failed attempt to push back above the 50-Day SMA (1.2585), but the Bank of Canada (BoC) interest rate decision may keep the exchange rate within the March range as the central bank is widely expected to retain the current course for monetary policy.

USD/CAD Outlook Hinges on Bank of Canada (BoC) Forward Guidance

USD/CAD snaps the opening range for April as longer-dated US Treasury yields extend the decline from the start of the month, and the exchange rate may continue to give back the rebound from the March low (1.2365) if the BoC adjusts the forward guidance for monetary policy.

The BoC rate decision may overshadow the update to Canada’s Consumer Price Index (CPI) as the central bank is slated to release the Monetary Policy Report (MPR), and it remains to be seen if the central bank will change its tone as “the Governing Council judges that the recovery continues to require extraordinary monetary policy support.

It seems as though the BoC is in no rush to switch gears as the central bank plans to “continue its QE (quantitative easing) program until the recovery is well underway,” and more of the same from Governor Tiff Macklem and Co. may generate a bearish reaction in the Canadian Dollar as officials pledge to “provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.

However, the BoC may strike a less dovish tone following the 303.1K expansion in Canada Employment, and the ongoing improvement in the labor market may encourage the central bank to gradually scale back its emergency measures in 2021 as it instills an improved outlook for growth and inflation.

Until then, USD/CAD may continue to track the March range amid the failed attempt to push back above the 50-Day SMA (1.2585), but the tilt in retail sentiment looks poised to persist as traders have been net-long the pair since May 2020.

Image of IG Client Sentiment for USD/CAD rate

The IG Client Sentiment report shows 66.46% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 1.98 to 1.

The number of traders net-long is unchanged from yesterday and 6.73% higher from last week, while the number of traders net-short is also unchanged from yesterday and 17.99% lower from last week. The rise in net-long interest has fueled the crowding behavior as 60.35% of traders were net-long USD/CAD last week, while the decline in net-short position could be a function of profit taking behavior as the exchange rate trades to a fresh monthly low (1.2471) ahead of the BoC rate decision.

With that said, the failed attempt to push back above the 50-Day SMA (1.2585) may lead to a further decline in USD/CAD like the behavior seen earlier this year, and the exchange rate may struggle to retain the rebound from the March low (1.2365) as it snaps the opening range for April.

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USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • The broader outlook for USD/CAD remains tilted to the downside as it trades to a fresh yearly low (1.2365) in March, with both the 50-Day (1.2585) and 200-Day (1.2956) SMA’s still tracking the negative slope carried over from the previous year.
  • The Relative Strength Index (RSI) highlights a similar dynamic as the indicator persistently holds below 60, with the oscillator indicating that the bullish momentum may continue to abate as it fails to retain the upward trend carried over from the previous month.
  • The Fibonacci overlap around 1.2620 (50% retracement) to 1.2650 (78.6% expansion) appears to be acting as resistance as USD/CAD struggles to push above the 50-Day SMA( 1.2585), with lack of momentum to hold above the1.2510 (78.6% retracement) to 1.2520 (23.6% expansion) region bringing the 1.2440 (23.6% expansion) area on the radar.
  • Next region of interest comes in around 1.2360 (100% expansion) to 1.2390 (38.2% expansion), which lines up with the March low (1.2365), followed by the overlap around 1.2250 (50% retracement) to 1.2280 (50% expansion).

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— Written by David Song, Currency Strategist

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