BOC Preview Ready to continue tapering but does that mean USDCAD will move lower

BOC Preview: Ready to continue tapering, but does that mean USD/CAD will move lower?

The Bank of Canada meets tomorrow, and indications point towards a tapering in the purchase of government bonds from C$3 billion per week to C$2 billion per week. Central Bank Governor Tiff Macklem has indicated that the decisions of the BOC will be data dependent. Since the last meeting on June 9th, most of the data has been stronger. Inflation for May was 3.6% YoY vs 3.4% YoY in April. Housing start and housing prices have also increased. The Ivey PMI for June released last week was 71.9 vs 64.7 in May. The Employment Change for June was +230,700 vs -68,000 in May and the Unemployment Rate fell to 7.8% from 8.2%. Finally, Average Hourly Wages for June was +0.1 YoY vs -1.4% YoY in May (inflationary). Retail sales were much worse, however Canada releases Retail Sales data 2 months later. Therefore, April’s data was released in late June. The print was already stale.

In addition, the uncertainty around OPEC+ and supply output should keep crude bid (inflationary). This may give the committee an additional reason to be more hawkish leaning.

Prime Minister Justin Trudeau has also recently indicated that Canada will loosen travel restrictions, a hopeful sign that the coronavirus is finally under control in Canada. With recent liftings of most restrictions, this may also help the Committee to issue a more hawkish statement on growth and inflation.

Everything you need to know about the Bank of Canada

USD/CAD price action is interesting on the daily timeframe. The pair had been forming a long-term descending wedge since the March 2020 pandemic highs. On April 21^st, when the BOC surprised the markets with a C$1 billion taper per week, USD/CAD sold off aggressively, overshooting the bottom trendline of the long-term wedge. However, price has moved back into and above the wedge since the June 9^th meeting. Today, on the eve of the expectation of another taper, USD/CAD sits near 1.2519, just over 100 pips away from the surprise taper on April 21^st. Notice that the RSI is also diverging with price.

Source: Tradingview, City Index

This bodes us to ask the question: With tapering from the BOC expected tomorrow, why isn’t USD/CAD lower (Canadian Dollar stronger)? The answer may have to do more with the movement of the US Dollar than it does with the movement of the Canadian Dollar. At the bottom of the chart below is the correlation coefficient. USD/CAD has become more strongly correlated with DXY since the April 21^st meeting. The current correlation coefficient is +0.82 (down from a recent perfect positive correlation of +1.00!). Any reading over +0.80 is considered a strong positive correlation. With the move higher in the DXY as of late, USD/CAD has moved higher as well.

Source: Tradingview, City Index

On a 240-minute timeframe in USD/CAD, the pair appears to be coiling in a symmetrical triangle for a move higher. Resistance is at todays highs and the downward sloping trendline near 1.2540. July’s 8^th highs of 1.2590 provide the next level of resistance and then the April 21^st highs (when the BOC gave us the taper surprise) at 1.2654. Support is at the bottom trendline of the triangle near 1.2450, ahead of horizontal support at 1.2366 and then the confluence of the June 23^rd lows and the bottom trendline of the long-term wedge (see daily) near 1.2252.

Source: Tradingview, City Index

Today, US CPI reached 5.4%, which leads to more questions regarding the timing of tapering in the US. In addition, tomorrow not only will we have the Bank of Canada meeting at 10:00am ET, but Fed Chairman Powell will give his semi-annual testimony to Congress at 12:00pm ET. These events could create a good deal of volatility in the pair, and even a decoupling of the 2 assets. Be aware of possible spikes in price around these events and size trades accordingly!

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