FX.co ★ USD/CAD: Canadian dollar ready to strike back

The USD/CAD currency pair has recently been following the general trends, focusing on the health of the greenback. And although the Canadian dollar has a fairly strong position, it plays the role of a follower, while the tone of the trades is set by the US dollar.

The fundamental picture for the USD/CAD pair differs significantly from other currency pairs in the major group. First of all, due to the declared positions of the Central Banks regarding the prospects for adjusting the conditions of monetary policy. The European Central Bank, Bank of England, Reserve Bank of Australia, SNB, and Bank of Japan - all listed regulators, figuratively speaking, crowd at the end of the queue in the context of tightening monetary policy parameters. For a certain time, the Reserve Bank of New Zealand held a rather hawkish position, but it also fell victim to the coronavirus as a result. The RNBZ curtailed the stimulus program in July and intended to raise the interest rate in August, but the delta strain of coronavirus, which nevertheless penetrated the island state, violated the plans of the New Zealand regulator.

Therefore, the US Federal Reserve remains the only central bank among the leading countries of the world, which (so far) declares its intention to curtail the stimulus program, and then (at the end of next year or early 2023) raise the interest rate.

The Bank of Canada, in turn, is following the Fed's footsteps. The Canadian regulator even outpaced its southern neighbor by announcing the phasing out of stimulus back in April. In July, it went from words to deeds, cutting net weekly purchases of government bonds to 2 billion Canadian dollars from the previous 3 billion value. At the same time, experts are confident that in this way, the Bank of Canada is paving the way for the first round of interest rate hikes already in the second half of 2022.

In other words, the loonie, along with the dollar, has "its own trump cards," which it uses very successfully, including in tandem with the greenback. Take a look at the W1 and (especially) MN timeframes: the USD/CAD pair from April last year to June this year was within the global downward trend. In total, the Canadian dollar has strengthened by more than 2,000 points - if at the beginning of April 2020 the price was in the area of the 42nd figure, then in July of this year the pair marked the price minimum at around 1.2006. After reaching this minimum, the loonie began to lose its positions again, and is currently trading at the borders of the 26th figure.

It is noteworthy that the Canadian dollar began to gradually (but consistently) lose its positions immediately after the announcement of the results of the July meeting of the Bank of Canada, at which the regulator, in fact, announced the start of curtailing the asset purchase program from $3 billion to $2 billion per week. This fact did not have any bearish effect: after a short-term price decline, the pair soared again, renewing its semi-annual price maximum. From July 14 (the day of the last meeting of the Bank of Canada) and until August 20 (when the dollar weakened due to the unexpectedly "dovish" speech of the Fed representative Robert Kaplan) the pair marched up more than 400 points.

In my opinion, this price dynamics is primarily due to market expectations. At its July meeting, the Bank of Canada made it clear that a further cut in the bond purchase program is "a big question" - at least in terms of the current year. At the same time, the US Federal Reserve, through the mouths of its representatives, began to gradually tighten its rhetoric in July, against the backdrop of a record rise in US inflation and strong nonfarm payrolls report. The pendulum swung towards the greenback again, and the USD/CAD pair began to gain momentum.

However, tomorrow the situation may change again, and in a dramatic way. If Jerome Powell disappoints traders on Friday with his cautious rhetoric, the loonie will be on top again, strengthening the downward trend. It should be recalled here that last week, the July data on inflation growth in Canada was published, which turned out to be in the "green zone" (in contrast to the similar American release, which disappointed investors). In annual terms, the general consumer price index stood at 3.7% - this is the best result since June 2011. The rest of the release components also showed positive dynamics.

In other words, the Canadian dollar can still show character - including paired with the US dollar. If Fed Chairman Jerome Powell does not support the greenback tomorrow, the downward trend will again be in effect.

Technically, the pair dropped to the support level of 1.2580 (the middle line of the Bollinger Bands indicator on the daily chart), but could not overcome it. If this target is overcome, the main target of the downward movement in the medium-term will be the level of 1.2470 - this is the Kijun-sen line on the W1 timeframe.