RSI Snaps Bullish Formation Following BoC Meeting


Canadian Dollar Talking Points

USDCAD trades to fresh monthly lows following the Bank of Canada (BoC) meeting, and recent developments in the Relative Strength Index (RSI) foreshadow a further decline in the exchange rate as the indicator snaps the bullish formation carried over from July.

USDCAD Forecast: RSI Snaps Bullish Formation Following BoC Meeting

USDCAD may struggle to retain the advance from the 2019-low (1.3016) as the BoC sticks to a wait-and-see approach, and it seems as though the central bank will keep the benchmark interest rate on hold throughout the remainder of the year as “the current degree of monetary policy stimulus remains appropriate.”

Image of BoC interest rates

The BoC appears to be in no rush to alter the forward guidance for monetary policy as “growth in the second quarter was strong and exceeded the Bank’s July expectation,” and Governor Stephen Poloz and Co. may stick to the same script at the next meeting on October 30 as “Canada’s economy is operating close to potential.”

In contrast, the Federal Reserve appears to be on a preset course to reverse the four rate hikes from 2018 as St. Louis Fed President James Bullard, a 2019-voting member on the Federal Open Market Committee (FOMC), insists that the central bank “should have a robust debate about moving 50 basis points” at its quarterly meeting scheduled for September 18.

With that said, it remains to be seen if the fresh updates to the US Non-Farm Payrolls (NFP) will impact the monetary policy outlook even though the economy is anticipated to add another 160K jobs in August as Fed Fund futures continue to reflect overwhelming expectations for a 25bp reduction later this month.

In turn, the Canadian Dollar may outperform its US counterpart amid speculation for back-to-back Fed rate cuts, and the diverging paths for monetary policy may spur a broader shift in USDCAD behavior as the exchange rate snaps the upward trend carried over from the previous year.

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USD/CAD Rate Daily Chart

Image of usdcad daily chart

Source: Trading View

  • Keep in mind, the broader outlook for USDCAD is no longer constructive as the exchange rate clears the February-low (1.3068), with the break of trendline support fostering a bearish outlook for Dollar Loonie.
  • At the same time, the rebound from the 2019-low (1.3016) appears to have stalled ahead of the Fibonacci overlap around 1.3410 (38.2% expansion) to 1.3420 (78.6% retracement), with the exchange rate at risk of extending the recent series of lower highs and lows as the Relative Strength Index (RSI) snaps the bullish formation from July.
  • The break/close below 1.3220 (50% retracement) brings the 1.3120 (61.8% retracement) to 1.3130 (61.0% retracement) region on the radar, with the next area of interest coming in around 1.3030 (50% expansion).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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