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USD/CAD Rate Outlook Hinges on BoC Interest Rate Decision

Canadian Dollar Talking Points

USD/CAD appears to be stuck in a narrow range after retracing the decline following the larger-than-expected uptick in Canada’s Consumer Price Index (CPI), but the Bank of Canada (BoC) interest rate decision may influence the exchange rate if the central bank alters the course for monetary policy.

USD/CAD Rate Outlook Hinges on BoC Interest Rate Decision

USD/CAD is little changed ahead of the BoC meeting on October 27 as the central bank is widely expected to keep the benchmark interest rate at the record low of 0.25%, and it remains to be seen if the update to the quarterly Monetary Policy Report (MPR) will reveal a shift in the forward guidance as the central bank remains “committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”

Image of DailyFX Economic Calendar for Canada

As a result, more of the same from the BoC may produce a bearish reaction in the Canadian Dollar as “the Governing Council judges that the Canadian economy still has considerable excess capacity,” but Governor Tiff Macklem and Co. may continue to winddown its quantitative easing (QE) program after reducing the target pace to C$ 2B per week in July as the most recent Employment report shows the labor market returning to pre-pandemic conditions.

In turn, USD/CAD may struggle to retain the rebound from the monthly low (1.2288) if the BoC further reduces the QE program and shows a greater willingness to alter the course for monetary policy, but a larger rebound in the exchange rate may continue to alleviate the tilt in retail sentiment like the behavior seen earlier this year.

Image of IG Client Sentiment for USD/CAD rate

The IG Client Sentiment report shows 75.81% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 3.13 to 1.

The number of traders net-long is 5.63% higher than yesterday and 0.29% higher from last week, while the number of traders net-short is 4.69% higher than yesterday and 6.01% higher from last week. The small uptick in net-long position comes as USD/CAD stages a rebound ahead of the BoC meeting, while the rise in net-short interest has helped to alleviate the tilt in retail sentiment as 76.82% of traders were net-long the pair last week.

With that said, fresh developments coming out of the BoC may keep USD/CAD under pressure if the central bank scales back its QE program and adjusts the forward guidance for monetary policy, but more of the same from Governor Macklem and Co. may fuel the rebound from the monthly low (1.2288) as the Federal Reserve prepares to switch gears later this year.

USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, USD/CAD cleared the January high (1.2881) in August as an inverse head-and-shoulders formation took shape, with the development indicating a shift in the broader trend as the 50-Day SMA (1.2593) established a positive slope.
  • However, the moving average has negated the upward trend as USD/CAD failed to take out the August high (1.2949), with the exchange rate extending the decline from the start of the month amid the lack of momentum to defend the August low (1.2453).
  • USD/CAD cleared the July low (1.2303) as the Relative Strength Index (RSI) dipped below 30, but the bearish momentum appears to be abating as the oscillator bounces back from oversold territory.
  • In turn, lack of momentum to test the 1.2250 (50% retracement) to 1.2260 (38.2% expansion) region has pushed USD/CAD back towards the 1.2360 (100% expansion) area, but need a break/close above the Fibonacci overlap around 1.2410 (23.6% expansion) to 1.2440 (23.6% expansion) to open up the 1.2510 (78.6% retracement) zone.
  • At the same time, failure to push back above the overlap around 1.2410 (23.6% expansion) to 1.2440 (23.6% expansion) may lead to another test of the 1.2250 (50% retracement) to 1.2260 (38.2% expansion) region, with the next area of interest coming in around 1.2140 (50% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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