Canadian Dollar, CAD, USD/CAD, CAD/JPY, EUR/CAD Talking Points:
- The Canadian Dollar caught a jolt yesterday when the BoC brought a hawkish warning to their rate decision.
- USD/CAD has clawed back a portion of that move already but CAD-strength may be more attractive elsewhere, against currencies such as the Japanese Yen or the Euro.
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
The Canadian Dollar received a jolt yesterday when the Bank of Canada brought a hawkish surprise to markets as they warned of persistent inflationary pressure. While the bank did hold rates flat, they also warned of faster than expected rate hikes and this helped to bring a run of strength into the Canadian Dollar.
With strong oil prices already keeping the CAD well-bid ahead of yesterday’s rate decision, the BoC just delivered another reason to like the long side of the currency. But, curiously, a day after that rate decision and USD/CAD has already erased a chunk of those CAD gains. And with FOMC on the docket for next week, along with a PCE release for tomorrow, there’s going to be some noise in the major pair near-term. Elsewhere, however, there may be more amenable pastures to look for this theme to run and I’ll look at two such pairs below.
I had touched on this one in the webinar yesterday and as of this point, there’s actually some bullish potential here, partly because of how oversold the pair had become. But from the weekly chart, last week produced a doji after two consecutive weeks of selling; making for two of the first three steps of a morning star pattern, which will often be approached with the aim of bullish reversals.
Also speaking to that potential is the fact that yesterday’s quick thrust lower around the surprise announcement could not even re-test last week’s low. Buyers stepped-in ahead of time.
But, for the bullish setup to become active, the morning star would need to confirm which means we’ll have to wait for this weekly bar to complete before the formation comes alive – and for that to take place we’re going to need to see prices move above 1.2416. If the weekly close is above that level, the morning star has formed and the pair has bullish potential. If it does not, there’s no setup and CAD strength may simply be more attractive elsewhere, in a non-USD pair.
USD/CAD Weekly Price Chart
CAD/JPY A Bullish Option
For those looking to operate with CAD-strength after yesterday’s rate decision, CAD/JPY may be a more attractive candidate.
The US Dollar is backed by a Federal Reserve that’s looking to get more hawkish, and next week brings another edition of the FOMC. The Bank of Japan, however, is nowhere near raising rates and last night saw the bank cut growth forecasts again. This helps to build the rates correlation where Yen weakness meshes very well with higher rates out of the US.
I talked about this theme in the Yen shortly after the Fed in September. And the currency sparked through the Q4 open and continued to run, all the way into last week at which point it began to pull back. I highlighted that last week just before those pullbacks really began to show.
The question at this point regarding the Yen is whether the pullback is over and whether the general trend of Yen-weakness is ready to return. If looking for a counter-party, the Canadian Dollar seems like it could be an attractive option.
At this point, CAD/JPY is constructive to the upside. Yesterday saw a quick spill down to support that buyers quickly responded to. Support held above the prior resistance point from the May swing-high. And also coming in for an assist at 91.64 is the prior three-year-high that was actually a double top formation back in late 2017/early 2018.
This can keep the door open for topside potential and bullish setups.
CAD/JPY Daily Price Chart
On that topic of rate decision, this morning brought the ECB to the fray. Christine Lagarde attempted to talk down the Euro but it looks like it didn’t really work as the currency is jumping in most pairs, EUR/CAD included.
But, this may be opening the door for some opportunity, especially from a fundamental perspective as we now have a pair represented by a dovish Central Bank on one side, and a hawkish Central Bank on the other.
On a long-term basis, the pair is at a big level, holding just above the current four-year-low at 1.4264. We’re already moving towards a possible area of resistance, taken from a previous cluster of support around the 1.4435 level, and above the 1.4500 psychological level can be looked to as another area for possible short-term resistance. Above that, an ‘r3’ level could be sought out around 1.4589.
EUR/CAD Weekly Price Chart
— Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX