Canadian Dollar Talking Points
USD/CAD approaches the April low (1.3855) as the Federal Reserve endorses a dovish forward guidance for monetary policy, and the exchange rate may ultimately snap the monthly range as it extends the series of lower highs and lows from earlier this week.
USD/CAD Rate on Track to Snap Monthly Range Following FOMC Meeting
USD/CAD reversed course during the previous week as the break of the descending channel formation failed to produce a test of the April high (1.4298), and the exchange rate may continue to give back the sharp advance from earlier this year as Fed Chairman Jerome Powell reiterates that the central bank is “committed to using our full range of tools to support the economy in this challenging time.”
In turn, Federal Open Market Committee (FOMC) may continue to utilize its unconventional tools in 2020 as Chairman Powell pledges to use the emergency lending powers “forcefully, proactively, and aggressively,” but it seems as though Fed officials are in no rush to deploy more non-standard measures as the central bank head insists that direct fiscal support “can make a critical difference, not just in helping families and businesses in a time of need, but also in limiting long-lasting damage to our economy.”
Nevertheless, the remarks suggest the FOMC will retain a dovish forward guidance for the foreseeable future as Chairman Powell pledges to “use our tools to assure that the recovery, when it comes, will be as robust as possible,” and the Bank of Canada (BoC) may take a similar approach as the central bank emphasizes that “substantial monetary stimulus needs to be in place to lay the foundation for the post-containment economic recovery.”
As a result, the BoC may continue to strike a dovish tone at its next meeting on June 3, but it remains to be seen if Governor Stephen Poloz will deploy more unconventional tools ahead of his departure in June as the central bank head insists that “the combination of aggressive fiscal action by governments and monetary stimulus by the Bank will create the best possible foundation for the recovery period.”
With that said, the broader outlook for USD/CAD remains constructive as the BoC “stands ready to augment the scale of any of its programs,” but the exchange rate may attempt to snap the monthly range as it extends the series of lower highs and lows from earlier this week.
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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 a larger correction in USD/CAD as the break of the descending channel formation failed to produce a test of the April high (1.4298), with the exchange rate coming up against the monthly low (1.3855) as it extends the series of lower highs and lows from earlier this week.
- Failure to retain the monthly range along with a break/close below the Fibonacci overlap around 1.3810 (50% retracement) to 1.3830 (100% expansion) may spur a move towards the 1.3730 (78.6% expansion) region, with the next area of interest coming in around 1.3610 (61.8% retracement) to 1.3660 (78.6% expansion).
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— Written by David Song, Currency Strategist
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