October 26, 2021 10:10:52

The Bank of Canada is widely expected to taper its weekly bond purchases from C$2bn to C$1bn at its first in-person meeting on Wednesday since the pandemic crisis began. The main focus will be on policy rate guidance and language around possible future rate hikes.

Disappointing recent GDP data needs to be balanced with rising inflation forecasts and the domestic labour market recovery. Indeed, the bank is likely to re-emphasise that price pressures will take a while longer to cool. Guidance has consistently been all along that rates will not be raised until slack has been eliminated.  

Governor Macklem will have to juggle markets pricing in a rate hike as soon as Springtime next year with remaining committed toward hikes later in 2022. This could give traders the chance to fade market pricing for an early hike if the bank simply reiterates a first hike in the second half of next year. But this starting point is still likely well ahead of its major peers, including the Fed. An enduring energy crisis will also support a bid in the loonie.

USD/CAD consolidation near recent lows

The loonie broke through trendline support at the start of this month. A bearish channel has ensued, hitting a low at 1.2288, a level last seen in June. Prices were oversold on the daily RSI and are now chopping around Fib level support of the June/August move at 1.2366.

The weekly “doji” candle points to indecision and a pause in the long-term downtrend. The mini recovery needs to push and close above the 1.24 zone to test the midway point of the June/August move at 1.2477. The 200-day SMA acts as further resistance at 1.2491.  

We think mild loonie losses may be seen as an opportunity to sell the major. If support at 1.2350 cracks, next support is 1.2252 ahead of the next Fib level (78.6%) at 1.2208.