The USD/CAD has been consolidating in a tight range over the past several weeks, but can finally see a sharp move this week?
The Loonie is facing a key test over the next couple of days as investors respond to the Bank of Canada’s latest policy decision today and await the latest US CPI data on Thursday. At the time of writing, the USD/CAD was near its session lows as the US dollar weakened on the back of falling bond yields, with the 10-year Treasury yields dipping below 1.5% to reach its lowest level since May 7
First up is the Bank of Canada’s
policy decision at 15:00 BST today with the press conference to follow half an hour later. No changes in rates or asset purchases are expected after the BoC reduced its asset purchases in the previous meeting. The central bank’s future adjustments to QE are going to be data-dependant. Over the past couple of months, employment from Canada disappointed expectations amid the return to some lockdown measures – though job postings still remain robust.
The BOC is widely expected to keep QE unchanged at this meeting but may reduce it further in July.
The key question is how hawkish or otherwise will the North American central bank be at this particular meeting. If the BOC surprises with a hawkish-sounding policy statement or press conference, then the USD/CAD may finally drop to that 1.20 key handle after rates have spent the last 4 weeks in a tight range just above this level. A very dovish BOC on the other hand would catch the markets by surprise, potentially leading to a sharp short squeeze rally.
Once the BOC is out of the way, all eyes will turn to US CPI inflation
, due for release on Thursday. CPI is expected to have climbed to 4.7% year-over-year in May, up from 4.2% previously, while core CPI is seen rising to 3.4% from 3.0% in April. On a month-over-month basis, CPI is seen rising 0.4% and core CPI is expected to print +0.5%. Unless inflation comes in well ahead of expectations, the Fed’s stance will not change materially, meaning equities could simply continue drifting higher until the FOMC meeting next week. But if we see a big reading, then inflation concerns could come back to haunt investors as this could raise speculation that price pressures are not going to be transitory. So, a lot depends on the outcome of the inflation report.
Given the importance of these macro events, traders need to be nimble when speculating on the near-term direction of the USD/CAD. Given that it is sitting very close to the 1.20 handle, and ignoring macro factors, I reckon it will get there soon – possibly as early as today. Technical selling below the hourly trend line could be the trigger. So, keep a close eye on rates and if price breaks below the hourly trend line after the BOC statement is released then we could well see a quick drop to the 1.20 handle before rates decide on their next move.