Canadian Dollar Talking Points
The federal election in Canada has done little to curb the recent decline in USD/CAD, and the advance from the 2019-low (1.3016) may continue to unravel as the exchange rate extends the series of lower highs and lows from the previous week.
USD/CAD Rate Depreciation Brings 2019 Low in Focus
USD/CAD takes out the September-low (1.3134) even though Canada’s Consumer Price Index (CPI) holds steady at 1.9% for the second consecutive month, with the exchange rate likely to exhibit a more bearish behavior as the data print does little to alter the monetary policy outlook.
The stickiness in the headline reading for inflation is likely to keep the Bank of Canada (BoC) on the sidelines as price growth sits just below the 2% target. In turn, Governor Stephen Poloz and Co. may stick to the same script at the next meeting on October 30 as “Canada’s economy is operating close to potential and inflation is on target.”
The BoC’s wait-and-see approach for monetary policy may continue to heighten the appeal of the Canadian Dollar and drag on USD/CAD as its US counterpart is expected to deliver another rate cut later this month.
In fact, Fed Fund futures now reflect a greater than 90% probability for another 25bp reduction on October 30, and the central bank may continue to reverse the four rate-hikes from 2018 in order to insulate the US economy from the shift in trade policy.
It remains to be seen how the Federal Open Market Committee (FOMC) will respond to ‘phase one’ of the US-China trade deal amid the dissenting views within the central bank, but Chairman Jerome Powell and Co. appear to be on track to implement lower borrowing costs as officials see the benchmark interest rate around 1.50% to 1.75% going into 2020.
With that said, the diverging paths for monetary policy fosters a bearish outlook for USD/CAD, with the exchange rate at risk of giving back the advance from the 2019-low (1.3016) as it extends the series of lower highs and lows from the previous week.
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USD/CAD Rate Daily Chart
Source: Trading View
- Keep in mind, the broader outlook for USD/CAD is no longer constructive as it clears the February-low (1.3068), with the break of trendline support fostering a bearish outlook for the exchange rate.
- Moreover, the rebound from the 2019-low (1.3016) has failed to generate a test of the Fibonacci overlap around 1.3410 (38.2% expansion) to 1.3420 (78.6% retracement), with recent price action bringing the downside targets back on the radar as USD/CAD takes out the September-low (1.3134).
- At the same time, the Relative Strength Index (RSI) offers bearish signal as the oscillator snaps the bullish formation from July and approaches oversold territory.
- The break/close below the 1.3120 (61.8% retracement) to 1.3130 (61.8% retracement) opens up the 1.3030 (50% expansion) region, with the next area of interest coming in around 1.2970 (78.6% retracement) to 1.2980 (61.8% retracement).
- Will keep a close eye on the RSI as a break below 30 would suggest the bearish momentum is gathering pace.
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— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong.