September 7, 2021 13:40:02
The Bank of Canada releases an updated policy statement on Wednesday. No changes are expected with the upcoming national election seeing the bank stand aside for now. There are no new forecasts or a Monetary Policy Report (MPR) until its next meeting in late October. Policymakers prefer to announce changes when these get published.
The BoC has steadily tapered purchases in three stages, from “at least” $5b per week at the start to the current $2b per week. Governor Macklem and his colleagues are predicted to err on the side of cautious optimism while recognising some uncertainty over rising Covid case counts. The bank will also acknowledge that the outlook has weakened after the disappointing second quarter GDP data. But recent strength in inflation, albeit driven by temporary factors, will support the current timeline of the output gap closing in the second half of next year.
CAD has recently been driven by the broader USD outlook with the overall risk environment underpinning the recent dollar selloff. There’s no doubt the Bank of Canada has been one of the more hawkish major central banks. Indeed, going forward the bank may offer more support to CAD with the market expecting another round of tapering of asset purchases at its October meeting.
USD/CAD bounces off 200-day SMA
Technically, late August saw USD/CAD spike higher to 1.2949. But a bearish “evening star” candlestick pattern emerged signalling the slowing down of upward momentum before the beginning of a new downtrend. Trendline support from the June lows has also been broken, but prices are trying to cling to the 1.26 level.
We are now trading just above the 50-day and 200-day moving averages and back around a range of key supports. If bullish momentum increases, then the chances of a deeper retracement of the USD’s rebound from the June low near 1.20 may recede. Buyers will look to extend gains beyond former trend support, now resistance, in the 1.26 area.
Targets below if the BoC pulls a bullish surprise include the 50% Fibonacci retracement level of the 1.20/1.2950 June/August move at 1.2478 and the mid-late July lows at 1.2423.
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