The Bank of Canada executed its most hawkish scenario yesterday, raising the interest rate by 50 basis points at once and announcing plans to start reducing the size of its balance sheet. This scenario was considered by most experts, but was not designated as a basic one. But the Canadian central bank showed determination, reacting to the continued growth of inflation indicators.
Moreover, the rhetoric of Bank of Canada Governor Tiff Macklem at the final press conference was also hawkish and decisive. The Canadian dollar's reaction was not long in coming: despite the general hegemony of the greenback, the USD/CAD pair showed a downward momentum, dropping more than a hundred points. However, further prospects for a decline look rather vague, given the assertiveness of dollar bulls. Therefore, it is not worth rushing with short positions now, especially since the bears have come close to the support level of 1.2540 (the average line of the Bollinger Bands indicator on the daily chart), and the fighting fuse, in fact, has dried up.
Nevertheless, the loonie received quite strong support from the Canadian central bank yesterday. If it were not for the "geopolitical swing" on which, by and large, the greenback is held, the USD/CAD pair would plunge by several figures. After all, do not forget that the loonie held the defense for a long time, even during periods of general strengthening of the US currency. Take a look at the weekly chart: throughout the current year, USD/CAD bulls have repeatedly tried to go above the 28th figure, but each time they returned to the price range of 1.25-1.24. Such stress resistance of the Canadian dollar is explained by many fundamental factors. Firstly, the Bank of Canada is actually on par with the Federal Reserve, and last year it even outstripped it by taking the first step towards normalizing monetary policy (Canadians started reducing QE a few months earlier). As for the interest rate, the central banks also acted synchronously here, raising it by 25 basis points in March. Today's 50-point increase is fully invested in the outline of the Fed's intentions to raise the rate by the same amount following the results of the May meeting (April is not on the calendar of meetings of the Fed).
Secondly, the oil market is on the side of the Canadian currency. Oil quotes continue to rise due to fears that the supply of black gold in the world will decrease due to sanctions against Russia. For example, yesterday Brent crude futures rose by 0.6% (to $ 105.2 per barrel), while WTI crude futures rose by 0.7% to $101.2. Meanwhile, quite alarming signals are coming from the negotiation fields: apparently, the negotiation process between Russia and Ukraine has reached an impasse. Given this fact, many relevant experts assume that the risk of interruptions in oil supplies will continue in the future. The so-called oil factor provides indirect support to the loonie.
Returning to the results of the Bank of Canada's April meeting, it should be noted the general hawkish attitude of the central bank. Just the phrase of Macklem "we are ready to act as decisively as necessary to combat inflation" is worth it! All the other theses voiced in one way or another served as confirmation of the main message. In particular, Macklem said that the central bank will most likely need to raise the interest rate "slightly above the neutral level in order to return supply and demand to equilibrium, and inflation, respectively, to the target level." Summarizing what has been said, Macklem once again stressed that interest rates will become "the main instrument of the central bank for adjusting monetary policy." At the same time, the central bank announced plans to start QT as early as April 25, starting to reduce the size of its balance sheet.
In other words, the Bank of Canada has made it clear that it will continue to pursue a course to tighten the parameters of monetary policy. In this regard, it is a worthy competitor to the US Fed. This fact allowed the USD/CAD bears to organize a large-scale counteroffensive to the downside.
But here it is necessary to take into account one important fact. Geopolitics on the greenback's side. Anti-risk sentiment in the market is again intensifying against the background of the energy crisis, Russian-Ukrainian negotiations (so far inconclusive) and the difficult situation around Taiwan (the day before yesterday, Taiwan's military conducted exercises simulating an air attack by the PRC army).
Therefore, the downward prospects of the USD/CAD pair look rather vague at the moment, despite the current price decline. Now the bears have reached the important support level of 1.2540 (the average Bollinger Bands line on the D1 timeframe coinciding with the Tenkan-sen line), so it is advisable to consider short positions only after overcoming this price barrier. In this case, the next target of the downward movement in the medium term will be the 1.2450 mark – this is the lower line of the Bollinger Bands on the same timeframe.