The Canadian dollar continues to drift on Wednesday, continuing the lack of movement we have seen throughout the month of March.
Bank of Canada
The Bank of Canada holds its monthly policy meeting later in the day (17:00 GMT). There is little expectation that there will be any change in interest rate levels, which currently sit at 0.25%. Most experts anticipate that the bank’s next move will be a tapering of asset purchases so as to slowly wean the economy off QE. Investors will be looking for some clues in this regard from the rate statement or the follow-up remarks from BoC Governor Macklem.
The BoC has long maintained that tapering would become necessary once the economy improved, and with the recovery taking hold at a faster pace than expected, that move could occur sooner rather than later. Canada’s economy declined by 5.4% in 2020, but has rebounded, with an unexpectedly strong gain of 9.6% in Q4. With the economy opening up in stages, growth is expected around 6.0% in 2021. If the economy does shift into higher gear, the BoC is likely to respond by tapering QE.
In the US, there are strong signs of a deepening recovery, such as the strong non-farm payroll report for February. The strict lockdowns and shutdown of many services across the country have resulted in significant pent-up demand, which is expected to translate into higher inflation. Investors will be keeping a close eye on CPI, which will be released on Wednesday (15:30 GMT). If inflation is higher than expected, the Fed may have to consider tapering stimulus earlier than expected.
USD/CAD Technical
- USD/CAD is testing long-term resistance at 1.2690. Above, we have resistance at 1.2827 and 1.2921
- On the downside, 1.2553 was under strong pressure on Thursday, but the pair recovered and this line has some breathing room. This is followed by support at 1.2373
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