BOC Preview: Poloz to Focus on USD/CAD?

In what could be one of the biggest fundamental catalysts left ahead of the holiday weekend, the Bank of Canada has its regular monetary policy meeting today at 10:00 ET (14:00 GMT). While the bank will almost certainly make no changes to monetary policy today, traders will be closely monitoring what the bank says about the economy, and crucially, the outlook for inflation moving forward.

When the bank dropped its hawkish bias last October, it forecast that inflation would be only 0.9% in the first quarter of this year. The most recent figures suggest that inflation in the country will actually come in at around 1.2%, and that it may continue to pick up throughout the year. Therefore, the central bank will have to toe a fine line between acknowledging the higher-than-expected inflation and avoiding giving the perception of any immediate rate hikes.

As an interesting point of note, BOC Governor Poloz did his PhD thesis on currency movements (“The Demand for Money in a Multicurrency World), so the recent fluctuations in the Canadian Dollar may play a larger role in the statement. Since the March 5 BOC meeting, the USD/CAD has spiked up toward 1.1275 (indicating Canadian Dollar weakness) before reversing back down to trade below 1.1000 as of writing (showing Canadian Dollar strength). While the absolute scale of these movements is not large, the Bank would probably prefer to see the Canadian Dollar weaken in order to support exporters and the still-weak economy.

The Technical View

The USD/CAD has bounced back from last week’s lows to test the psychologically-significant 1.1000 level, which also represents previous-support-turned-resistance from the late March lows. This only represents about a 38.2% Fibonacci retracement of the late March – early April drop, suggesting that the bears are still in control of trade for now. The secondary indicators confirm this analysis, with the MACD indicator still below its signal line and the “0” level, while the RSI appears to be finding near-term resistance around the 45 level after an oversold bounce.

Given the technical evidence of a near-term downtrend in USD/CAD, it will likely take a dovish statement from Governor Poloz to drive the pair back above 1.1000. The next levels of resistance would be the 50-day MA near 1.1050 and the 61.8% Fibonacci retracement at 1.1115. To the downside, support is possible around the 100-day MA at 1.0925 and last week’s lows at 1.0860.