Canadian Dollar Talking Points
USD/CAD is little changed from the start of the week amid the limited reaction to the semi-annual testimony with Federal Reserve Chairman Jerome Powell, but recent developments in the Relative Strength Index (RSI) warn of a larger correction as the indicator bounces back from oversold territory and offers a textbook buy signal.
USD/CAD Reversal from March Low Still in Focus Following BoC Testimony
USD/CAD appears to be stuck in a narrow range as Chairman Powell largely refers to the June policy statement in front of Congress, and it seems as though the central bank has little intention of deploying more non-standard measures as the Federal Open Market Committee (FOMC) pledges to “evaluate our monetary policy stance and communications as more information about the trajectory of the economy becomes available.”
The Bank of Canada (BoC) appears to be on a similar path as Governor Tiff Macklem tells Canadian lawmakers that “market functioning has improved considerably,” with the prepared remarks revealing that the central bank has “scaled back the frequency of some operations because financial market participants are not using them.”
However, Governor Macklem warns that there’s “a long way to go, and not all the jobs that were lost are coming back” even though the central bank expects “economic growth to resume in the third quarter.” As a result, the BoC may utilize its balance throughout 2020 as officials are “committed to continue purchases of Government of Canada bonds until the economic recovery is well underway.”
Nevertheless, Governor Macklem insists that “any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target,” and the comments suggest the BoC will carry out a wait-and-see approach over the coming months as “the Bank’s policy actions are designed to complement the government’s fiscal efforts.”
In turn, BoC officials may continue to rule out a negative interest rate policy (NIRP) for Canada, and Governor Macklem and Co. may soften the dovish forward guidance at the next meeting on July 15 as the unprecedented efforts taken by monetary as well as fiscal authorities “will position the economy for recovery.”
With that said, USD/CAD may face range bound conditions as the FOMC and BoC appear to be taming speculation for additional monetary support, but recent price action raises the scope for a larger correction as the exchange rate reverses at the March low (1.3315), while the Relative Strength Index (RSI) bounces back from oversold territory and offers a textbook buy signal.
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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, the pullback from the yearly high (1.4667) may continue to evolve as USD/CAD fills the price gap from March, with the Relative Strength Index (RSI) highlighting a similar dynamic as the oscillator continues to track the downward trend in May.
- USD/CAD appears to be stuck in a narrow range after failing to clear the monthly high (1.3801), but recent price action warns of a larger correction as the exchange rate reverses at the March low (1.3315), while the RSI bounces back from oversold territory and offers a textbook buy signal.
- Will keep a close eye on the RSI as it approaches trendline resistance, with a break of the bearish formation likely to be accompanied by a near-term advance in USD/CAD.
- Need a close above the Fibonacci overlap around 1.3610 (61.8% retracement) to 1.3660 (78.6% expansion) along with a break of trendline resistance in the RSI to bring the 1.3720 (78.6% expansion) region on the radar, with the next area of interest coming in around 1.3810 (50% retracement) to 1.3830 (100% expansion).
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— Written by David Song, Currency Strategist
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