The US dollar and the Canadian dollar is a popular currency pair due to the large amount of cross-border trading activity that takes place between The United States and Canada. Canadian bank kept policy unchanged yesterday, while the statement accompanying the decision had a relatively dovish tone. Even though the Bank noted the strength of recent economic data, such as employment and inflation figures, it appeared quite hesitant to signal any near-term rate hikes. Instead, policymakers ended the statement by indicating that they will continue to be cautious in making future adjustments to the policy rate.
The Loonie plunged on the decision, possibly due to the absence of any hawkish signals that investors may have expected given the strength of the aforementioned data. Moving forward, the currency’s near-term direction will likely depend on the evolution of incoming data, as they could determine whether the BoC will hike in Q1 2018. At the time of writing, market pricing suggests roughly a 60% probability for a hike by March, according to Canada’s overnight index swaps. Should fresh Canadian data be strong in the next weeks, this percentage could rise and thereby, push CAD higher. On the other hand, weaker data could bring USD/CAD under renewed buying interest.
USD/CAD surged after the BoC decision from near the 1.2660 support level to break above the resistance (now turned into support) level of 1.2750. During the European morning Thursday, the rate looks to be headed for a test of the 1.2840 hurdle. Despite yesterday’s surge, we believe that the pair could continue to trade in a sideways manner in the range established from the 25th of October, between the 1.2660 support barrier and the 1.2920 resistance. For the picture to turn to positive, we would like to see a clear break above the 1.2920 level. Something like that would signal a higher high on the 4-hour chart and could set the stage for more bullish advances, towards the 1.3000 zone. On the other hand, a break back below the 1.2660 support barrier could turn the picture negative, and open the way for further declines towards 1.2600.