Canadian Dollar Talking Points

USD/CAD appears to be on track to fill the price gap from March after snapping the range bound price action from April, but the Bank of Canada (BoC) interest rate decision may curb the recent decline in the exchange rate if the central bank takes additional steps to support the Canadian economy.

USD/CAD Rate Eyes Price Gap from March Ahead of BoC Rate Decision

USD/CAD continues to give back the advance from the March low (1.3315) as the Federal Reserveprepares to have the Municipal Liquidity Facility along with the Main Street Lending Program up and running in June, and it remains to be seen if the BoC will further utilize its balance sheet after unveiling the Provincial Bond Purchase Program along with the Corporate Bond Purchase Program in May.

Image of DailyFX economic calendar for Canada

It seems as though the BoC will retain a proactive approach in combating the economic shock from COVID-19 as the “global economic recovery, when it comes, could be protracted and uneven,” and the central bank under Tiff Macklem may continue to push monetary policy into uncharted territory as “Bank analysis of alternative scenarios suggests the level of real activity was down 1-3 percent in the first quarter of 2020, and will be 15-30 percent lower in the second quarter than in fourth-quarter 2019.

In turn, fresh developments coming out of the BoC may produce a bearish reaction in the Canadian Dollar if the central bank implements more non-standard measures or expands the scope of its asset purchase programs.

However, Governor Macklem may favor the status quo during his first meeting at the helm as the central bank insist that the “fiscal and monetary policy actions will help underpin confidence and stimulate spending by consumers and businesses to restore growth.

As a result, the BoC may stick to the same script and reiterate that the “Governing Council stands ready to adjust the scale or duration of its programs if necessary,” and more of the same from the central bank may trigger a bullish reaction in the Canadian Dollar as market participants scale back bets for additional monetary support.

With that said, the pullback from the yearly high (1.4667) may continue to evolve as USD/CAD snaps the range bound price action from April, and the bearish behavior may persist in June as the Relative Strength Index (RSI) approaches oversold territory.

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USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, the near-term rally in USD/CAD emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the yearly opening range highlighting a similar dynamic as the exchange rate failed to test the 2019 low (1.2952) during the first full week of January.
  • The shift in USD/CAD behavior may persist in 2020 as the exchange rate breaks out of the range bound price action from the fourth quarter of 2019 and clears the October high (1.3383).
  • However, recent price action suggests the pullback from the yearly high (1.4667) will continue to evolve as USD/CAD takes out the April low (1.3850),and the exchange rate may continue to exhibit a bearish behavior in June as the Relative Strength Index (RSI) extends the downward trend from the previous month.
  • At the same time, the RSI may offer a bearish signal if the oscillator breaks below 30 and pushes into oversold territory.
  • Need a break/close below the 1.3510 (38.2% expansion) to 1.3540 (23.6% retracement) region to open up the Fibonacci overlap around 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement), which would essentially fill the price gap from March, with the next area of interest coming in around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement).
  • However, lack of momentum to hold below the 1.3570 (78.6% expansion) region may spur a move back towards the Fibonacci overlap around 1.3610 (61.8% retracement) to1.3660 (78.6% expansion), with the next topside hurdle coming in around 1.3720 (78.6% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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