Central banks dominate FX moves

This week I have been focusing on the Canadian dollar and the prospect of looser monetary policy as the economy feels the pinch from declining oil prices.

Canadian dollar
Source: Bloomberg

In a surprise decision, the Bank of Canada (BoC) cut rates by 25 basis points (to 0.75%) as the country faces a benign inflation outlook and the sharp falls in oil and gas prices negatively impact growth expectations.  The CAD sold off in response, with USD/CAD rallying to a high of $1.2394 and trading at its highest level since April 2009.

I have flagged opportunities in the pair this week and I think traders who are already long should consider trailing stops in the pair. Needless to say, the BoC has shown its cards and if oil prices remain under pressure then further action is likely. I continue to favour buying dips in the pair as the two currencies continue to experience diverging fundamentals.

Euro in focus ahead of ECB meeting

EUR/USD is the other key pair to watch at the moment given the upcoming ECB decision. The headline will be the size of the programme on a nominal basis, with broad expectations of a €550 billion plan. A report also emerged overnight suggesting the ECB proposed spending €50 billion a month through to December 2016.

After weeks of weakness in the single currency, some traders will be sceptical the ECB might disappoint. However, whichever way it goes it’s hard to see any sustained strength in the euro. As a result, I’ll be looking to sell rallies into $1.1800 with stops above $1.2000 if EUR/USD reverses higher on the back of the ECB. I’d say momentum traders should look to sell the pair on a break below support in the $1.1500 region.

EUR/USD
Click to enlarge

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