Fundamental Analysis

USD/CAD Surges as Canadian Dollar Slides on BoC Statement

Typography

As the US dollar continued to rebound on Wednesday, the Canadian dollar fell sharply after the Bank of Canada issued its latest interest rate decision and statement. The central bank kept its overnight rate on hold at 1.00%, as widely expected, but also issued a statement that was seen as more dovish than expected given the recent series of relatively strong economic data releases out of Canada. In its statement, the BoC continued to stress caution amid risks and uncertainties. Despite rising inflation, higher GDP, and stronger employment indicators, the statement asserted that "the global outlook remains subject to considerable uncertainty, notably about geopolitical developments and trade policies," and that the "Governing Council will continue to be cautious."

Meanwhile, as the Canadian dollar fell on perceived dovishness from the BoC statement, the US dollar, as noted, continued to rise in its recent rebound that has been driven largely by progress in US tax reform. Together, the continued US dollar rebound and BoC-driven fall for the Canadian dollar prompted a substantial USD/CAD surge from a key support area on Wednesday.

From a technical perspective, USD/CAD has generally traded in a range for more than a month below its 200-day moving average. This range-trading has occurred within the context of a general rebound from multi-year lows that started in early September. Having now bounced from the range-bottom support (around the 1.2650 price region), USD/CAD is currently reaching up towards its range highs (slightly above the 1.2900 handle).

With US tax reform still making progress towards realization and the US Federal Reserve preparing for a very likely rate hike during next week's FOMC meeting, current policy divergence between the US and Canada could result in further impending gains for USD/CAD, potentially extending its noted recovery from September lows. In this event, the key upside breakout level to watch continues to be the 1.2900-area highs, with any further rise potentially meeting major resistance around the key 1.3000 psychological level.

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