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USD/CAD Levels to Watch Following New BoC Bond Purchase Programs

Canadian Dollar Talking Points

USD/CAD extends the rebound from the monthly low (1.3855) as the Bank of Canada (BoC) announces new measures to cushion the Canadian economy, and the exchange rate may continue to retrace the decline from the yearly high (1.4667) as it breaks out of the downward trending channel carried over from the previous month.

USD/CAD Levels to Watch Following New BoC Bond Purchase Programs

USD/CAD climbs to a fresh weekly high (1.4132) as the BoC unveils a “new Provincial Bond Purchase Program of up to $50 billion, to supplement its Provincial Money Market Purchase Program,” with the central bank also announcing a “Corporate Bond Purchase Program, in which the Bank will acquire up to a total of $10 billion in investment grade corporate bonds in the secondary market.”

Image of BoC interest rate decisions

Source: BoC

It seems as though the BoC will rely on its non-standard tools to combat the weakening outlook for growth as Governor Stephen Poloz and Co. keep the benchmark interest rate at 0.25%, and the central bank may continue to utilize its balance sheet over the coming months as the “Governing Council stands ready to adjust the scale or duration of its programs if necessary.

In turn, the BoC may endorse a dovish forward guidance throughout 2020 as “Bank analysis of alternative scenarios suggests the level of real activity was down 1-3 percent in the first quarter of 2020, and will be 15-30 percent lower in the second quarter than in fourth-quarter 2019,” but it remains to be seen if the central bank will take additional steps at its next meeting on June 3 as Governor Poloz and Co. insist that “the combination of aggressive fiscal action and monetary stimulus will create the best possible foundation for the recovery period.

With that said, USD/CAD may exhibit a bullish behavior throughout the year especially as the US Dollar benefits from the flight to safety, and the rebound from the monthly low (1.3855) may gather pace over the coming days as the exchange rate breaks out of the descending channel formation carried over from the previous month.

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USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, the near-term rally in USD/CAD emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the yearly opening range highlighting a similar dynamic as the exchange rate failed to test the 2019 low (1.2952) during the first full week of January.
  • The shift in USD/CAD behavior may persist in 2020 as the exchange rate breaks out of the range bound price action from the fourth quarter of 2019 and clears the October high (1.3383).
  • With that in mind, USD/CAD appears to have reversed course ahead of the Fibonacci overlap around 1.3810 (50% retracement) to 1.3830 (100% expansion), with the exchange rate sitting up against the 1.4010 (38.2% retracement) to 1.4040 (23.6% retracement) region as it breaks out of the downward trending channel carried over from the previous month.
  • Need a break/close above the overlap around 1.4010 (38.2% retracement) to 1.4040 (23.6% retracement) to bring the 1.4260 (23.6% retracement) region on the radar, with the next area of interest coming in around 1.4650 (261.8% expansion) to 1.4660 (78.6% retracement).
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— Written by David Song, Currency Strategist

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