The Bank of Canada (BoC) has been optimistic about growth and inflation despite data suggesting otherwise in Q1. Th BoC remained optimistic, holding the overnight rate at 0.75%. However, there was a tone of concern regarding the recent rise of the Canadian Dollar.
“Despite the recent back-up in global bond yields, financial conditions for Canadian households and firms remain highly stimulative. The Canadian dollar has strengthened in recent weeks in the context of higher oil prices and a softer U.S. dollar. If these developments are sustained, their net effect will need to be assessed as more data become available in the months ahead.” From the Official BoC Statement
This should keep a lid on CAD strength, and possible pressure it in the short-term. Let’s take a look at the USD/CAD and CAD/JPY.
The USD/CAD has rebounded in May after making a low on the year at 1.1903. It remains bullish after the BoC statement. This rally is a mainly a USD-recovery story, but the fact that the BoC seems cautious should soften the CAD as well. The technical and fundamental pictures suggest USD/CAD has upside risk back to the highs on the year around 1.28. IF there is a pullback, a bullish market should keep price above 1.2350. A break below 1.23 would likely put away the bullish outlook. This scenario would likely be due to USD-weakness, resulting from weak data that would suggest another delay in the FOMC’s rate hike (after September).
The CAD/JPY has been bullish since its low on the year at 91.72. In May, the pair found resistance at 100.09 as the market. The BoJ is even more dovish than the BoC, so if price breaks above 100.10, we should see a continuation towards the 104.00 handle. On the other hand, after today’s cautious BoC statement, there is pressure on the 98.22 May consolidation low. A break below 98.20 would bring up the 96.50 area, which is a key support. We should limit the bearish outlook to 96.50 unless the BoJ announces plans to scale out of its stimulus measures, which is highly unlikely.
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