Canadian Dollar in ‘calm before storm’ ahead of BoC meeting

• Canadian Dollar is little changed on Tuesday as markets hold back before the key interest rate decision by the Bank of Canada.

• Core Inflation has fallen substantially in Canada whereas it remains stubbornly high in the US, and this is bullish for USD/CAD.

• The technical picture is mixed but slightly bullish after the break above the key 1.3270 high.

Canadian Dollar (CAD) trades at around the same level of its previous day’s open and close against the US Dollar (USD), on Tuesday, ahead of the key Bank of Canada (BoC) interest rate decision on Wednesday. 

USD/CAD is trading in the upper 1.32s as the US session gets underway.  

Canadian Dollar news and market movers 

• The Canadian Dollar trades flat in a calm-before-the-storm effect as traders await the BoC Interest Rate Decision scheduled for 14:00 GMT, Wednesday, July 12. 

• The Core Consumer Price Index (CPI) drives interest rate decisions, and in Canada, core inflation has fallen to 3.7% from 4.1% in the last reading, placing less pressure on the BoC to continue raising rates. 

• Since higher rates are positive for CAD as they draw more capital inflows, a decision to leave rates unchanged would be negative for CAD, and positive for USD/CAD, which would probably rise since the Federal Reserve is, in contrast, almost certain to raise rates at its July 26 meeting, given the 5.3% Core CPI inflicted on the US.

• The BoC is prone to surprising markets, however, as FXStreet Senior Analyst Yohay Elam points out in his BoC preview, so one cannot completely discount the possibility of a hike at Wednesday’s meeting.  

• Such a move would benefit from the advantage of surprise and probably see USD/CAD sell off substantially.

Canadian Dollar Technical Analysis: Short-term trend giving mixed signals

USD/CAD is in a long-term uptrend on the weekly chart, which began after price rose following the 2021 lows. Since October 2022, the exchange rate has been in a sideways consolidation within the uptrend. Given the old saying that ‘the trend is your friend’, however, the probabilities overall an eventual continuation higher, favoring longs over shorts.-

USD/CAD appears to have completed a large measured move price pattern that began forming at the March 2023 highs. This pattern resembles a 3-wave zig-zag, much like an ABC correction in which the first and third waves are of a similar length (labeled waves A and C on the chart below). 

USD/CAD’s measured move looks like it has completed given waves A and C are of a similar length. This suggests price probably bottomed at the June 27 lows and is now at the start of a new cycle higher. 

US Dollar vs Canadian Dollar: Weekly Chart

A confluence of support situated under the June lows in the upper 1.3000s, that is made up of several longer moving averages and a major trendline, provides a backstop to further losses. Only a decisive break below 1.3050 would indicate this thick band of weighty support has been definitively broken, bringing the uptrend into doubt. 

US Dollar vs Canadian Dollar: Daily Chart

The daily chart shows how price has now broken decisively above the 1.3270 key last lower high of the prior downmove, which is a bullish sign. ¡

USD/CAD subsequently rose up to just shy of the 1.3400 crossroads where the 50-day Simple Moving Average (SMA) is located, last Thursday, before reversing lower last Friday. The long green up day followed by the long red down day creates a two-bar reversal pattern which is a short-term bearish sign, however, this clashes with the other bullish indications, suggesting a balanced market. 

It will take a decisive break above the 50-day SMA to keep the uptrend momentum going. Canadian Dollar bulls marginally have the upper hand with the odds slightly favoring a continuation higher.