Bank of Canada follows Fed lead with a 50 basis point cut, reports Joe Perry.
Yesterday in our Bank of Canada preview, we noted that if the Bank of Canada were to cut rates Wednesday it would most likely be on the back of global stimulus due to the Coronavirus, and less about the Canadian economy itself. Indeed, the Bank of Canada did cut rates today by 50 basis points from 1.75% to 1.25% (the lowest level since mid-2018) and noted that it was primarily because the Coronavirus would be a negative shock to the economy. The Committee would continue to monitor developments and adjust monetary policy further if necessary.
The U.S./Canadian dollar currency pair (USDCAD) rallied after the announcement, even though price had already been moving higher since yesterday in anticipation of a possible rate cut (see chart). The headline expectation was for unchanged at 1.75%, however after the U.S. Federal Reserve surprisingly cut rates by 50 basis points, forex markets began pricing in a BOC cut as well. The 50-basis-point cut was more than markets hoped for and this sent USD/CAD to resistance at the 127.2% Fibonacci extension from the highs from Nov. 20, 2019 to the lows on Dec. 31, near 1.3430. Above there is resistance at Friday’s highs near 1.3465. Horizonal support comes across at 1.3330, and dips to 1.3250 are likely to be bought, as trendline support and horizontal support meet near that level.
Source: Tradingview, FOREX.com
As Canadian interest rates sit at 1.25%, higher than most of G7 countries (including the U.S. Fed Funds rate between 1.00%-1.25%), markets may begin to price in another rate cut by the BOC. If such a scenario were to occur, USDCAD could continue moving higher. On a daily timeframe, it’s easy to see how price has been moving higher since the Dec. 31 low and pulled back at resistance near 1.3330 to the 200-day moving average as the relative strength index (RSI) became overbought, forming a flag formation.
On Feb. 21, USDCAD broke out of the flag. The target for a flag is the length of the flagpole added to the breakout point of the flag. In this case the target is near 1.3590, just above the horizontal resistance from May 31st, 2019. Of course, nothing moves in a straight line, and a pullback would give the RSI room to unwind as buyers may look to step in and buy the dip.
Source: Tradingview, FOREX.com
Traders now will be waiting and watching as the Coronavirus continues to spread across the globe. With rates at 1.25%, Canada still has room to cut. If the virus continues to plague global growth, including Canada, there may be more ahead from the Bank of Canada.
Joe Perry holds the Chartered Market Technician (CMT) designation and has 20 years of experience in the FX and commodities arenas. Perry uses a combination of technical, macro, and fundamental analysis to provide market insights. He traded spot market FX and commodity futures for 17 years at SAC Capital Advisors and Point 72 Asset Management.
