Will the BoC spark further USD/CAD upside?

The continued deterioration in oil prices has led a sharp and consistent devaluation in the Canadian dollar. With the BoC meeting due later this week, we look at the outlook of USD/CAD ahead of the meeting.

Source: Bloomberg

There is no getting around it, Canada is in a mess. The incessant deterioration in crude oil prices has created a toxic environment for the Canadian economy, leading unemployment to its highest level since 2013. However, for traders the clearest indicator of this perceived economic weakness has been through the incessant appreciation of USD/CAD which has moved onto another level in terms of its intensity in 2016. So far we are yet to post a single down day for the pair and while today is currently in the red, it would be entirely unsurprising should we see yet another green day by midnight.

This week sees the Bank of Canada (BoC) return to the fold, with market expectations pointing towards a 25 basis point cut at Wednesday’s meeting. The BoC started 2015 with a rate cut, which was followed up by another move in July. One year on from the first Canadian rate hike since 2009, we are staring at the possibility of yet another move, back down to the 2009/10 low of 0.25%.

Given the heavy reliance upon commodities, there is a clear need to prop up the economy and quite frankly, given the current pathway of oil prices, one hike will most probably not suffice, with further to come in 2016. The upshot of any further rate hikes would likely be further devaluation of the Canadian dollar which would raise demand for domestic goods and deter consumption of imported goods.

The worry is when markets have factored in a large part of the rate hike, we see a situation where the upside associated with a hike is disproportionately smaller than the downside attached with a decision to remain at 0.5%.

From a technical standpoint, there is a great trend in place, with USD/CAD posting a remarkably consistent uptrend since breaking through C$1.3457 resistance back in December. Looking at the 4-hour chart, this uptrend, consisting of higher highs and higher lows is incredibly reliable and thus unless we see price close back below C$1.4334, the bullish view remains. While there is the potential for a ‘buy the rumour, sell the fact’ situation on Wednesday, the appreciation is likely to continue pre-announcement and key support levels will be watched for the event itself.

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