The U.S. dollar/Canadian dollar (USD/CAD) currency pair has taken a sharp drop over the past couple of days. For once, the sharp move hasn’t been because of crude oil. Instead, it was driven by comments made by Bank of Canada officials, suggesting that the central bank was preparing to raise interest rates.
First, it was BOC Deputy Governor Carolyn Wilkins, who spoke yesterday. She said that as growth continues, the bank’s governing council will be “assessing whether all the considerable monetary policy stimulus presently in place is still required.” In case she wasn’t clear, she had this to add: “Just think about it, if you saw a stop light ahead, you would start letting up on the gas so that you could slow down smoothly. You don’t want to have to slam on the brakes at the last second. Monetary policy must also anticipate the road ahead.” Echoing his deputy’s hawkish comments, BOC Governor Stephen Poloz today said that the past interest rate cuts have largely done their job as the Canadian economy gathers momentum.
So, the long and short of it is that the Bank of Canada appears to have turned hawkish and may tighten its policy in the upcoming meetings. That’s why the CAD has risen. But as I reported earlier, crude oil could fall further and this may limit the gains for the currency. The USD/CAD may not be the best CAD pair to trade/watch ahead of the FOMC meeting tomorrow, but it is fast approaching a key support level around 1.3210. What happens here could have important implications for the trend going forward. A potential breakdown could see the Loonie stage a deeper correction as more bulls are forced to liquidate their positions, while a failure to move lower could lead to a sharp short covering bounce. This 1.3210 level is important because it was previously resistance and corresponds with the bullish trend line. If this level breaks decisively then the USD/CAD may drop to test 1.2970/5 next: an old support and 61.8% Fibonacci retracement level.