After Tuesday’s rebound in the US dollar and sell-off in crude oil, the USD/CAD surged above the 1.26 handle. Changes in crude oil prices are always important for the Canadian dollar, but the North American currency faces a potentially volatile day ahead with inflation data coming up at 13:00 ahead of the Bank of Canada’s policy decision, due at 15:00 BST, and the BOC press conference at 16:00.
The Bank of Canada is widely expected to reduce its asset purchases today. A stronger-than-expected economic recovery and the big recovery in crude oil prices means there is less need to keep the QE taps wide open, and the bank officials have already started laying the groundwork for the start of policy normalisation. There are also not a lot of bond to purchase anyway, especially as the government financing requirements have been scaled back with a recovering economy.
Well, the BOC is expected to cut its weekly bond purchases to C$3 billion from the current pace of C$4 billion. But will there be a surprise?
It is also worth watching the BOC press conference, for at least two reasons. First, Governor Tiff Macklem may give clues about the timing of the first-rate hike. Will he bring forward expectations, with current guidance pointing to no move before 2023? Secondly, will Macklem say anything about the strength of the Canadian dollar, which is going to be a major headache if not addressed as it could weigh on exports. By being too hawkish, the Canadian dollar will appreciate. So, he may sound less hawkish than some might expect, and will probably err on the side of caution as the Covid pandemic is far from being near over.
Crude oil on shaky footing
If you trade the Canadian dollar, it is worth keeping
a close eye on crude oil given that the latter makes up a big bulk of Canada’s export revenues. Oil prices have come under renewed selling pressure because of the situation in India, the world’s third largest crude consumer of oil and where Covid deaths have hit new daily record amid an upsurge in virus cases. Renewed worries over demand saw prices reverse on Tuesday, and more losses could be on the way if the situation in India deteriorates. Meanwhile, the American Petroleum Institute (API) reported U.S. crude supplies rose by 436,000 barrels for the week ended April 16. If confirmed by official data from the Energy Information Administration later today, this could push oil prices lower given that prior expectations were for crude inventories to drop by 4.4 million barrels.
Will USD/CAD break THIS key resistance area?
So, the BOC is very likely to become one of the first major developed central banks to reduce emergency levels of monetary stimulus. But how much of a reduction will we see and how hawkish is the central bank going to be? With the USD/CAD holding near its 2021 lows, the market has priced in a hawkish BOC, so the bigger risk would be if the BOC turns out to be more dovish than expected. If so, rates could finally break through THIS key resistance between 1.2600 to 1.2665:
Source: ThinkMarkets and TradingView.com