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USD/CAD Rate Eyes June Low on Wait-and-See BoC Policy

Canadian Dollar Talking Points

USD/CAD extends the pullback from the monthly high (1.3646) as the Bank of Canada (BoC) retains the current policy in July, and the exchange rate may continue to give back the advance from the June low (1.3315) as the central bank largely endorses a wait-and-see approach for monetary policy.

USD/CAD Rate Eyes June Low on Wait-and-See BoC Policy

USD/CAD approaches the July low (1.3491) as the BoC pledges to “hold the policy interest rate at the effective lower bound,” and it seems as though the Governing Council is in no rush to deploy more non-standard tools as the central bank plans to carry out “large-scale asset purchases of at least $5 billion per week of Government of Canada bonds.

Image of Bank of Canada interest rate

Source: BoC

The BoC insists that the “the Bank is prepared to provide further monetary stimulus as needed,” but the update to the Monetary Policy Report (MPR) suggests the BoC will stick to the sidelines throughout the remainder of the year as the central scenario shows the Canadian economy growing “5.1 percent in 2021 and 3.7 percent in 2022.”

In turn, the BoC may tame speculation for additional monetary support as “the combination of the very low policy rate and asset purchases is providing considerable monetary stimulus,” but the central bank appears reluctant to drop the dovish forward guidance as Governor Tiff Macklem warns that “the exceptionally strong near-term growth of the reopening phase is likely to give way to a slower and bumpier recuperation phase.

With that said, USD/CAD may continue to consolidate asit snaps the ascending channel formation from the previous month, while the advance from earlier this month unravels ahead of the June high (1.3801).

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USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, the USD/CAD correction from the 2020 high (1.4667) managed to fill the price gap from March, with the pullback in the exchange rate pushing the Relative Strength Index (RSI) into oversold territory for the first time since the start of the year.
  • However, the RSI has failed to retain the downward trend from May as USD/CAD reversed from the March low (1.3315), with the development highlighting a potential shift in market behavior as the exchange rate continues to track the June range.
  • In turn, USD/CAD may continue to consolidateas it snaps the ascending channel formation following the failed attempt to test the June high (1.3801), with lack of momentum to break/close above the 1.3610 (61.8% retracement) to 1.3660 (78.6% expansion) pushing the exchange rate towards the July low (1.3491).
  • Need a close below the Fibonacci overlap around 1.3510 (38.2% expansion) to 1.3540 (23.6% retracement) to bring the 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) region on the radar, with the next area of interest coming in around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement), which lines up with the June low (1.3315).
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— Written by David Song, Currency Strategist

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