USD/CAD: Bank of Canada Policy Meeting on Radar After Elections

After a day with limited volatility in the market, the greenback was virtually unchanged against most of the G10 currencies, decreased against the euro and the Canadian dollar while it surged versus the New Zealand dollar than plunged after the dairy auction.

The New Zealand currency dragged down by the Global Dairy Trade (GDT) auction that dropped the dairy products prices. The GDT Price Index fell by ‐3.1% that reflected immediately at the country’s currency.

The shared currency edged higher against almost all of the major counterparts on Tuesday and early Wednesday despite the absence of market affecting news ahead of ECB meeting on Thursday. On the other hand, the sterling slumped against almost all of its G10 peers as the BoE Governor Mark Carney said that may be needed to preserve the financial stability. He also commented on the UK exit from the Eurozone and defended the central bank’s independence.

Bank of Canada – Policy Meeting
The U.S. dollar fell severely versus the Canadian dollar as the Canada ensured the Justin Trudeau managed to ensure its Parliamentary majority on Monday’s elections and promised for fiscal stimulus. This may change today’s Bank of Canada’s decision as the new Prime Minister Justin Trudeau may have a different opinion regarding monetary policy. The Bank of Canada slashed its benchmark interest rate twice in 2015 and is not expected to cut interest rates one more time.

However, the macroeconomic front for Canada has worsened more from the previous meeting. The unemployment rate picked up with a huge decline in full‐time employees. More than 60,000 lost their jobs. The Retail Sales ex Autos stagnated as well as inflation rate on a monthly basis. Moreover, GDP contracted by ‐0.1% in Q2 following ‐0.2% in Q1. The trade deficit expanded in August more than twice July’s deficit. Manufacturing Production continues to narrow while building permits decreased.

USD/CAD – Technical Outlook
The USD/CAD continues to move higher for the second consecutive day, holding steady slightly below the key level of 1.3000. Given the clear break below the latter level, I expect to see a return to 1.2900. For the time being the pair is finding support at the 1.2970 level, temporary at least. The 4‐hour 50‐SMA has been tested on a few occasions during the rally and the response at this level each time has been quite bullish, since the price crossed above the 50‐SMA few days ago.

However, the recent failed attempts above the 1.3080 barrier and more recently above the 1.3050, shows that the market remains cautious ahead of the BoC meeting later in the day. On the daily chart, the pair has been under correction since its peak at 1.3460. Since then, it fell more than 2.5%.

With the above in mind, in order to gain any real traction again, we need to see all of these levels broken – 1.3015, 1.3050 and 1.3080 – otherwise we could see a slow grind lower with the pair testing the 50‐SMA, around 1.2950 and then the psychological level of 1.2900. Finally, volatility is expected to pick up within the upcoming short period with the BoC policy meeting.

Economic Indicators
On Wednesday morning, traders will watch closely the UK September’s public net sector net borrowing. Beyond that, the spotlight of the day is the Bank of Canada policy meeting. The central bank cut its benchmark interest rate twice in 2015, 25bp each time to 0.50%. In this meeting, no changes in the monetary policy are expected. Even though, I would expect the Canadian dollar to be affected from the press conference will follow. Overnight, the national Australia bank’s business confidence for Q2 will be out.