› The Loonie plunged after BoC: what’s next?

The Loonie plunged after BoC: what’s next?

USD/CAD failed to breach the support of 1.31 after two attempts and bounced back up toward 1.34 on the back of dovish Bank of Canada. The three-days wild action seemed to ease the volatility and many traders and analysts try to guess what’s going to happen next. We’ll try to bring some light on what really happened with the Loonie this week and what is the best trading strategy for USD/CAD and other cross-rates with the Canadian dollar.

Before we start the analysis, we need to understand the background and previous market expectations. There were rumours spreading in the foreign exchange market that the Bank of Canada is going to start the tightening process, hiking the interest rates several times this year. The main source of those rumours was related to the macroeconomic data, which showed that the Canadian economy is not in such a bad shape as it was previously anticipated. The unemployment rate was staying at low levels, the economy was adding much more jobs in December and January than forecasted, Canadian exporters were able to withstand the plunge in oil prices, factory orders and trade balance was improving significantly. Currency speculators were excited about the WTI Crude price which bounced off the local bottom of $42 per barrel and charted an impressive rally towards $57 per barrel. The Loonie was buoyant, USD/CAD sank below 1.32.

The Bank of Canada was surprising dovish this week. The economic statement showed that the regulator officials would like to have a cautious position, taking the wait-and-see approach on the economic outlook, as well as the interest rates. The rule of no hurting was the key driver for the BoC voting members, who decided not only to leave the interest rates unchanged but also had signalled the market players that they should not take into the account a rate hike in the foreseeable future. As a result, USD/CAD soared for more than 300 pips in one single week, leaving cautious sellers far behind, and breaking several crucial technical levels. It’s also worth noting that the pair climbed North without any significant selling pressure from the side of oil prices. The explanation is extremely simple, as there are several reasons for such sharp price action.

First, traders and currency speculator had simply taken profits from recent short positions before the BoC, which keeps surprising traders. Second, the dovish comments brought additional buying pressure as an overreaction. Some traders had comprehended the regulator’s dovishness as an intention to cut the interest rates. However, the regulator did not say a word about such a scenario. Third, the greenback had shown a decent portion of strength recently, mainly thanks to Powell’s confident testimony in the US Senate. The Federal Reserve Chairman was clearly hawkish on the back of sustainable economic growth in the largest world’s economy, as well as some improvements in the inflationary pressure. The market players took those words as a signal to price in at least one hike by the Fed this year.

However, the real greenback’s strength will be tested today, right after the Non-Farm Payrolls report will be published. The main trouble is that the expectations are a bit higher than the moving average. It would be rather tough to add 200K more jobs for the US economy in February, especially in the scope of the government shutdown which took more than 4 weeks of a struggle. Moreover, there could be a down-revision for January’s NFP, which was extremely huge - 320K! If that happened, the greenback would fall sharply.

At the same time, the Canadian unemployment data will be published together with the US NFP report, and that news should influence USD/CAD the most. In case if the Canadian data appeared to be stronger than the US NFP, then we would not be surprised to see USD/CAD dropping back down to 1.3200 and beyond, an extension. Otherwise, the pair could test 1.35 resistance.

Technically speaking, the market is stuck below an important resistance level. We mean the Fibonacci Retracement level of 78.6% from the uptrend which started on October 02 2018. If the daily (and weekly, by the way) close price was able to clearly breach that level (1.3466), then further upside pressure would stay on the table. If not, the downtrend will resume with all of its power, pushing USD/CAD lower than 1.3100 support. The best trading strategy for conservative traders is to wait and see this week’s close price in order to understand market intentions. Aggressive traders should consider watching the US NFP report and Canadian unemployment data today and act accordingly, comparing the figures between each other. Buying put options for USD/CAD on the labour market data publishing does not look like a completely losing solution, especially in the light of too high expectations.

USD/CAD
Source:MarketsPro


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