Canadian Dollar Talking Points
USD/CAD consolidates despite the break of the descending channel, and the exchange rate may trade within a more defined range amid the failed attempt to test the monthly high (1.4298).
USD/CAD Rate Breakout Flops Ahead of April High
USD/CAD continues to pullback from the weekly high (1.4265) amid the limited reaction to Canada’s Consumer Price Index (CPI), and the exchange rate appears to be on track to revisit the monthly low (1.3855) as it initiates a fresh series of lower highs and lows.
However, the update to Canada’s CPI warns of a more pronounced slowdown in economic activity as the headline reading for inflation narrows to 0.9% from 2.2% in February amid forecasts for a 1.1% print.
The economic shock from COVID-19 may push the Bank of Canada (BoC) to deploy more non-standard measures as “the economy is also being hurt by the plunge in world oil prices,” and the central bank may continue to endorse a dovish forward guidance at its next meeting on June 3 as “substantial monetary stimulus needs to be in place to lay the foundation for the post-containment economic recovery.”
It remains to be seen if BoC Governor Stephen Poloz will utilize more unconventional tools ahead of his departure in June as the central bank head insists that “the combination of aggressive fiscal action by governments and monetary stimulus by the Bank will create the best possible foundation for the recovery period,” but the Governing Council may retain a proactive approach in supporting the Canadian economy as the “Bank stands ready to augment the scale of any of its programs should market conditions warrant it.”
With that said, USD/CAD may exhibit a bullish behavior throughout 2020 as the US Dollar benefits from the flight to safety, but the rebound from the monthly low (1.3855) may continue to unravel over the coming days as the break of the descending channel formation fails to generate a run at the April high (1.4298).
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USD/CAD Rate Daily Chart
Source: Trading View
- Keep in mind, the near-term rally in USD/CAD emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the yearly opening range highlighting a similar dynamic as the exchange rate failed to test the 2019 low (1.2952) during the first full week of January.
- The shift in USD/CAD behavior may persist in 2020 as the exchange rate breaks out of the range bound price action from the fourth quarter of 2019 and clears the October high (1.3383).
- However, recent price action in USD/CAD warns of range bound conditions as the break of the descending channel fails to generate a test of the monthly high (1.4298), with the exchange rate carving a fresh series of lower highs and lows amid the lack of momentum to break/close above the 1.4260 (23.6% retracement) region.
- In turn, failure to hold above the Fibonacci overlap around 1.4010 (38.2% retracement) to 1.4040 (23.6% retracement) may push USD/CAD back towards the monthly low (1.3855), with a break/close below the 1.3810 (50% retracement) to 1.3830 (100% expansion) region bringing the 1.3730 (78.6% expansion) area on the radar.
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— Written by David Song, Currency Strategist
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