Market Analysis

USDCAD: Dovish comments from the FED hit the currency pair ahead of BoC interest rate decision

The Federal Reserve (Fed) will be sensitive to risks in the markets according to Chairman Jerome Powell, who assured last week the central bank will be viewing how the economy performs this year and will adjust the monetary policy should growth slow suddenly.

Meanwhile, the policymaking Federal Open Market Committee (FOMC) raised its target interest rate four times in 2018 and estimated the likelihood of two more increases this year. However, analysts’ expectations believe differently, and in fact, are pricing in about a 28% chance of a rate cut by the end of 2019 and no chance of an increase.

The Bank of Canada (BoC) is likely to keep its interest rate at 1.75% when it announces monetary policy this week. At its latest meeting in early December, the central bank sounded more cautious with regards to the domestic economic outlook, in part due to the ongoing weakness in oil prices. The Canadian Dollar is usually highly correlated to crude oil prices since Canada is an important exporter of the commodity.

The US unemployment rate increased to 3.9% in December 2018 compared to 3.7%registered in the previous month and failed analysts’ forecast of 3.7%. It was the highest jobless rate since July 2018, as the number of unemployed persons increased by 276K to 6.3 million and employment advanced by 142K to 156.9 million. Usually, a higher rate is seen in recessionary economies, while on the contrary, a growing economy sees its unemployment rate decreasing. Therefore, a decrease in the figure is seen as positive for the USD, while an increase is seen as negative.

The Canadian unemployment rate came in unchanged at 5.6% in December of 2018, the same as in the previous month and slightly below analysts’ estimates of 5.7%. It remains the lowest jobless rate since comparable data became available in 1976. An increase in the rate indicates a lack of expansion within the Canadian labour market. As a result, a rise leads to weakening the Canadian economy. Normally, a decrease in the figure is seen as positive for the CAD, while an increase is seen as negative.

The net change in employment increased to 9.3K jobs in December of 2018, comparing to 94.1K created in November and well above analysts forecast of 5.0K. Usually, a rise in this indicator has positive implications for consumer spending which stimulates economic growth. Therefore, a high reading is seen as positive for the CAD, while a low reading is seen as negative.

Since the beginning of the year 2019 until last Monday close, the USDCAD remains negative with a loss of almost 2.5% and since the start of January managed to decline over 2.0%. Nonetheless, the currency pair began the week on the left foot with a loss of almost 0.7% although, on the daily time-frame closed in the red with a 0.67% loss. Furthermore, the currency pair is in a potential phase change, shifting from a bullish to a warning phase.

On yesterday session, the USDCAD fell with a narrow range and closed near the low of the day, in addition, managed to close below Friday low, which suggests a strong bearish momentum.

The stochastic is showing an extremely oversold market although is still displaying a bearish momentum.

In December, the currency pair managed to make a new year-to-date high at 1.3664 where it consolidated by the end of December 2018 and slightly into early January but did not take long to see a strong sell-off. The last three days of sharp decline suggests a sentiment change on the USDCAD instead of a simple correction. The next projected target should be the daily support at 1.3213 followed by the 200-day moving average now at 1.3136.


USD/CAD Daily Candlestick Chart

USD/CAD Daily Candlestick Chart


Market Events to Watch: 


Wednesday, January 09 at 15:00 GMT (10:00 ET): The Bank of Canada (BoC) is scheduled to publish a study of economic movements in Canada, which gives investors a detailed insight into the economic conditions that influenced the decision on where to set interest rates and any changes in this report tend to affect the CAD volatility. If the BoC report shows a hawkish outlook that is seen as positive for the CAD, while a dovish outlook is seen as negative.


Wednesday, January 09 at 15:00 GMT (10:00 ET): The Bank of Canada (BoC) is scheduled to release the interest rate decision, which is expected by market analysts to stay unchanged at 1.75%. A rise in the interest rates it is seen as positive for the CAD. On the other hand, if the BoC keeps the ongoing interest rate, or cuts the interest rate it is seen as negative.


Wednesday but at 19:00 GMT (14:00 ET): The Federal Open Market Committee (FOMC) is scheduled to release its meeting Minutes, which are released by the Board of Governors of the Federal Reserve (Fed) and are a clear guide to the future US interest rate policy.


Thursday, January 10 at 17:00 GMT (12:00 ET): The Federal Reserve (Fed) Governor Jerome H. Powell is scheduled to speak. As head of the Fed, which controls short-term interest rates, he has more influence over the US dollar value than any other person does. Traders closely watch his speeches as they are often used to drop hints regarding future monetary policy.


Friday, January 11 at 13:30 GMT (08:30 ET): The US Bureau of Labor Statistics is scheduled to release the final figure of the consumer price index (CPI) year-on-year for December 2018, which is expected to come in unchanged at 2.2%, the same as the previous period. The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as positive for the USD, while a low reading is seen as negative.


Written by Hugo O’Neill, External Analyst


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