The Bank of Canada will be meeting on Wednesday, 13th July for its monetary policy meeting. Expectation heading into the BoC’s event is for no change to interest rates, which anyways stands at historic lows of 0.50%. While this might seem a tad bullish for the Canadian dollar, the Bank of Canada could come out dovish, especially in light of the Brexit referendum; although the impact is likely to be very limited as far as the Canadian economy is concerned. It leaves much of the argument on the domestic issues facing Canada.
On Monday, Macquarie analyst David Doyle said in a research note that the Bank of Canada would not hike interest rates until the second quarter of 2019. This was lower than the previous call for a rate hike in Q2 2018. Analyst David Doyle said, “We lower our equilibrium forecast for the Government of Canada 10-year bond yield for the current expansion to 1.5% (prev. 2.0%, cons. 2.7%), a level we believe will be reached at end-18.”
In early June, Bank of Canada warned that the surging real estate prices were not sustainable. The central bank, in its assessment of the financial health, noted that the vulnerabilities due to the continued rise in household debt were higher than they were six months ago, indicative that the BoC could be holding back from cutting rates even if they wanted to. The no rate cut could, therefore, be offset by a dovish tone from the central bank, citing the weak job creation, and high levels of trade deficit.
Heading into the event, EURCAD long positions have received a lot of interest. TD Securities, along with Morgan Stanley reiterated long positions in EURCAD for a target of 1.50. They said that “the current divergence in the European and US real yields point to a short term gain in the EURUSD.“
This, alongside the fact that the Bank of England’s meeting could see interest rates being cut, which in turn could support the EURGBP. Based on the currency flows, both TD Securities and Morgan Stanley expect to see the euro appreciate against the Canadian dollar in the near term and could get a boost with the BoC’s event.
USDCAD is also showing signs of a bullish reversal following the near symmetrical triangle breakout yesterday. Immediate resistance is seen at 1.3115, a confirmed breakout above this level could trigger further upside with the next main resistance at 1.3697 coming into the picture. The US dollar index has been bullish with price action forming a bullish flag breakout, indicative of near-term strength in the greenback.
Oil prices, another factor that has been supportive for the Canadian dollar has also continued to remain weak over the past week. Although prices are seen testing the 200-day moving average, the near-term bounce is likely to have a limited impact on the Canadian dollar.
Yesterday, the Canadian dollar fell to a 6-week low against the US dollar. Analysts pointed out that the Canadian jobs report was weaker in comparison to the US data, and many expect the BoC come out dovish at its meeting on Wednesday. Last Friday’s jobs report showed that Canada showed a net loss of 700 jobs. The unemployment rate fell largely due to lower participation rate with full-time workers dropping 40k while part-time hiring increased by 49k. It was also one of the worst quarters in the Canadian job market in nearly two years.
The technical chart for USDCAD shows prices firstly breakout from the long-term declining trend line. This was followed by a brief retest close to the breakout level before USDCAD settled into an ascending triangle consolidation phase. Resistance at 1.31 is key for a breakout to the upside, in which case, the US dollar could be seen extending its gains towards 1.345. On the other hand, a breakout to the downside from the minor rising trend line could see USDCAD slide towards the support level of 1.265.
