USD/CAD Forecast: likely to test 1.2600 on pessimistic BOC quarterly policy report

USD/CAD extends its upward trajectory during the European session, largely on the back of solid US dollar comeback after weaker Chinese macro data release boosted the demand for the reserve currency. The US dollar index which measures the relative performance of the greenback against six major currencies, drop reached session highs at 99.57 and now trades at 99.43, recording 0.42% gain on the day. The pair remains underpinned despite rising oil prices which fails to lift the loonie. USD/CAD currently trades higher by 0.45% at 1.2546 levels, hovering close to fresh session highs posted at 1.2549 levels.

Technically, on the daily chart, USD/CAD fails to break above the strong resistance at 5-DMA located at 1.2549 levels on several occasion with the upside. To the downside, the pair finds good support at the channel trend line placed at 1.2430. The pair is seen struggling near highs around 1.2530 levels and further upside momentum is likely to build beyond a break of 5-DMA barrier.

On the macroeconomic front, we have a fairly busy North American calendar with Canada reporting Manufacturing sales data at 12.30PM GMT and at the same time the US is likely to report a series of macro data including the industrial production data. However, the main highlight for today’s session is expected to be the Bank of Canada’s (BOC) monetary policy decision followed by the central bank’s quarterly monetary policy report and Governor Poloz’s speech at the press conference.

The USD/CAD pair is expected to remain elevated on BOC’s policy announcement and the following BOC events may further add to the rally in the pair.

As widely anticipated, BOC is expected to keep its monetary policy steady with rates on hold, being consistent with the March status-quo. BOC Governor Poloz is expected to reiterate its “wait-and-see” approach, echoing what was said in the last policy meet in March that “some time to see how the economy actually responds to lower oil prices.”

Hence, not much volatility is expected from BOC’s rate decision on USD/CAD as its expected to be a non-event. However, what may drive major moves on the CAD pair is the BOC’s quarterly monetary policy assessment report and as Poloz has already stated earlier that the economic data for the first quarter will be “atrocious” due to the collapse in oil prices.

Said that, the big question arises that to what extent BOC will have to reduce their economic projections and how strongly and quickly the central bank expects the economy to recover. These underlying factors would be reflected in the bank’s quarterly report which may weaken the Canadian dollar backing our case for further upward momentum in USD/CAD.

Analysts at Bank of America Merrill Lynch notes, “The BOC will likely toe the party line that a factory recovery will offset the energy-sector drag later this year. Although the BOC could cut its 1Q GDP growth forecast to 0.5 per cent from 1.5 per cent in the MPR, they will likely boost growth in later quarters.”  

Further Charles St-Arnaud, Nomura Securities believes, “With the economic contraction in January, it will be hard for growth in Q1 to be stronger than 1 per cent. Moreover, given the comments from Governor Poloz that growth in Q1 is likely to be ‘atrocious,’ we would expect very weak growth on the quarter … However, we believe the BOC will continue to expect a relatively sharp growth rebound in [the second half of] 2015.” 

Based on the above fundamentals and technical also in favour, it’s expected that USD/CAD may rise to 1.2600 levels on bearish BOC report.

Overall, USD/CAD is seen extending gains in the bullish flag pattern with upside capped by 5-DMA.The daily RSI at 49 aims higher and inches towards the bullish terrain indicating likelihood of further upside. The pair is likely to test 1.2600 levels beyond a break of 5-DMA resistance at 1.2549 on pessimistic BOC quarterly monetary policy report. However, if the report is viewed as optimistic than CAD bulls may take charge and the pair is likely to drop t0 1.25 barrier, below which floors would open for a retest of channel trend line support at 1.2430.