Dovish BOC Risks

The Loonie is in focus this week as traders prepare to receive the BOC’s latest rate decision tomorrow. The pair has advanced more than 3% off last week’s lows as traders brace for a potential intensification in the bank’s easing program. The market is looking for a .5% cut from the bank tomorrow, in line with the continued downtrend in inflation readings we’ve seen recently. The move, which would be the fourth cut in a row from the bank, would be its first outsized rate reduction in 15 years and comes against a backdrop of deteriorating consumer and business spending.

Fed Outlook

In contrast to these more dovish expectations, the market has recently adjusted its Fed outlook. The bank is now widely expected to cut rates by just .25% at the next meeting, up from .5% initially, with a further quarter-point move seen in December. This view is also subject to upside risks if we see a further strong labour market reading next time around.

BOC/Fed Divergence

Given the divergence between the market’s expectations for forthcoming BOC and Fed action, USDCAD looks vulnerable to a breakout higher near-term. If the BOC cuts by .55 tomorrow and signals that further reductions are still likely appropriate, this should help drive the pair higher into the November FOMC, particularly if oil prices remain subdued near-term too.

Technical Views

USDCAD

Looking at the pair on the weekly chart, we can see that we are right up against significant resistance at the 1.3866 level. This is a key barrier for the pair and a break higher here will be firmly bullish, turning focus to 1.3976 and 1.4105 above. To the downside, 1.3586 will be next support to watch.