Canadian dollar sheds profits on Wednesday ahead of the Bank of Canada monetary policy meeting. The bank is expected to keep rates unchanged at 0.25% as well as cutting down its quantitative easing program.
The Canadian dollar restored dominance over its peers in March, rising most against the Euro and Yen. EURCAD dropped over 400 pips in March prior to Tuesday while CADJPY jumped by over 300 pips. Meanwhile, the USDCAD has stayed range-bound as a result of the renewed broad-based dollar strength. However, since Tuesday, CAD is retreating across the board as the oil price falls from the over one-year peak.
The recent CAD strength was driven by the robust recovery in the Canadian economy as seen in the robust housing sector, fresh US stimulus and most especially a massive surge in the oil price. OPEC+’s decision to play the waiting game before increasing supplies has strengthened the energy market and driven up prices. On Wednesday, all eyes will be on the BoC. Will the bank be confident enough to taper its current asset purchasing program or play the waiting game?
The stage is set for the BoC on Wednesday to unveil its monetary decisions going forward. It’s quite understandable that the bank will be under no pressure despite the renewed lockdowns in some provinces. The re-opening of the economy as a result of the successful vaccine roll-out is driving in optimism and investors look forward to the central banks curbing their respective QEs. At the current level, the BoC operates an asset purchasing program worth C$4 billion per week. Market consensus expects the bank to cut down this pace while holding the interest rate at the current 0.25%. If this happens, we will most likely see CAD regaining intensity over many of its peers. However, if the BoC disappoints the market and decides to wait till the next meeting, we can expect the current CAD retreat to continue.
USDCAD stays range-bound
Since the surge to 1.2745, USDCAD remains in a sideways range over the last 11 days. The long-term bearish trend ended just above 1.2465. If we would see more corrective surge, the currency pair should resume toward 1.29 at the end of the current range-bound pattern.
This will happen quickly if the BoC ignores the market’s expectation of tapering. Else, tapering with a hawkish tone will drive the currency pair below the 1.2575-1.2565 support. However, tapering with a mixed tone could limit the dip around the support zone mentioned above and thus attract fresh bullish traction. We should see corresponding reactions across other CAD FX pairs.
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