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USD/CAD Outlook Ahead of BOC Meeting

By Crispus Nyaga

Last year, the Canadian dollar, also known as the Loonie was the worst-performing currency among the G10 currencies. It declined by more than 8% against the USD. This happened as the Canadian economy weakened slightly as the price of crude oil declined. This year, the currency has returned to a positive territory, gaining sharply against the USD. YTD, the currency has gained by 3%.

The recent bullish trend on the currency could change as the Bank of Canada delivers its interest rates decision later today. The expectation is that the bank mayleave rates unchanged at 1.75%. Analysts are divided about the way forward for the bank after it delivered a relatively dovish statement. In a note yesterday, Blackrock, the biggest money manager in the world said that the bank could pause rate hikes throughout the year. The manager said that the Canadian economy continues to weaken mostly because of the oil prices and the housing sector. This thinking has been confirmed by the short-end traders as the overnight swaps point to no tightening this year.

On the other hand, Morgan Stanley has advised its clients to remain bullish on the Loonie. In a note, the bank said that while the economy continues to have some headwinds, the risk of a hawkish surprise is growing.

With the sentiment of the Loonie so high, there is a likelihood that the currency will see a reversal today. As shown below, the pair’s RSI has moved back to the oversold level as the price remains below the main moving averages. In case of a dovish statement, there is a likelihood that the pair will test the Fibonacci Retracement level of 38.2% of 1.3400.

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