Canadian Dollar Talking Points
USD/CAD pares the decline from earlier this month following the limited reaction to the 1.994M decline in Canada Employment, and the exchange rate may continue to track the April range as Bank of Canada (BoC) Governor Stephen Poloz prepares to depart from the central bank.
USD/CAD Rate Tracks April Range Ahead of BoC Governor Departure
USD/CAD approaches the monthly high (1.4173) as it carves a fresh series of higher highs and lows, but the exchange rate may trade within a more defined range in May as BoC Governor Poloz steps down in June.
It remains to be seen if Canada’s Employment report will influence monetary policy as the update showed the biggest decline since the data series began in 1976, and the economic shock from COVID-19 may put pressure on the BoC to implement more non-standard measures as the jobless rate jumps to 13.0% from 7.8% in March.
In turn, the BoC may continue to endorse a dovish forward guidance at its next meeting on June 3 as Deputy Governor Carolyn Wilkins warns that “this situation will cause Canadian gross domestic product to plunge as much as 15 to 30 percent in the second quarter from its level in late 2019,” and the central bank under Tiff Macklem may continue to push monetary policy into uncharted territory as the “Governing Council stands ready to adjust the scale or duration of its programs if necessary.”
With that said, the Canadian Dollar may face headwinds throughout 2020 as the BoC keeps the door open to deploy more unconventional tools, and the broader outlook for USD/CAD remains constructive as the exchange rate breaks out of the descending channel from earlier this year.
However, USD/CAD may consolidate throughout May as the decline from the monthly high (1.4173) stalls ahead of the April low (1.3850), and the exchange rate may trade within a more defined range amid the string of failed attempts to break/close above the 1.4260 (23.6% retracement) region, which sits just below the April high (1.4298).
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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).
- However, recent price action warns of range bound conditions as the break of the descending channel formation failed to produce a test of the April high (1.4298), with the recent decline in USD/CAD sputtering ahead of the April low (1.3850).
- In turn, USD/CAD appears to be on track to test the monthly high (1.4173) as it carves a fresh series of higher highs and lows, with a break/close above the Fibonacci overlap around 1.4130 (100% expansion) to 1.4140 (161.8% expansion) bringing the 1.4260 (23.6% retracement) region on the radar, which sits just below the April high (1.4298).
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— Written by David Song, Currency Strategist
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