USD/CAD Rate Tracks Monthly Range as Federal Reserve Expands MLF

  


Canadian Dollar Talking Points

USD/CAD may continue to track the monthly range ahead of the Federal Reserve interest rate decision as the break of the descending channel formation fails to produce a test of the April high (1.4298).

USD/CAD Rate Tracks Monthly Range as Federal Reserve Expands MLF

USD/CAD extends the decline from the previous week as the Federal Reserve expands the scope of the Municipal Liquidity Facility (MLF), with the program to now offer “up to $500 billion in lending to states and municipalities.”

The press releases also highlighted that the “Federal Reserve is also considering expanding the MLF to allow a limited number of governmental entities that issue bonds backed by their own revenue to participate directly in the MLF as eligible issuers,” and it seems as though the Federal Open Market Committee (FOMC) will continue to implement unconventional measures to support the US economy as the central bank “remains committed to using its full range of tools to support the flow of credit to households, businesses, and communities to counter the economic impact of the coronavirus pandemic.”

It remains to be seen if the FOMC will deploy more non-standard tools at its interest rate decision on April 29 as US lawmakers push through another $484B stimulus program to assist small businesses and hospitals through the pandemic, and Chairman Jerome Powell and Co. may revert to a wait-and-see approach as the Trump administration outlines a three-phased approach to reopen the economy.

However, the FOMC may retain a dovish forward guidance as “the timing of the resumption of growth in the U.S. economy depended on the containment measures put in place,” and the central bank may continue to utilize its balance sheet to combat the weakening outlook for growth as the rate cuts from earlier this year pushed “the target range to its effective lower bound (ELB).”

In turn, speculation for additional monetary support may generate a bearish reaction in USD/CAD, and the exchange rate may trade within a more defined range over the coming days amid the failed attempt to test the monthly high (1.4298).

Nevertheless, the broader outlook for USD/CAD remains constructive as the US Dollar benefits from the flight to safety, and the exchange rate may exhibit a bullish behavior throughout 2020 as it breaks out of the range bound price action from the fourth quarter of 2019.

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USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, the near-term rally in USD/CAD emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the yearly opening range highlighting a similar dynamic as the exchange rate failed to test the 2019 low (1.2952) during the first full week of January.
  • The shift in USD/CAD behavior may persist in 2020 as the exchange rate breaks out of the range bound price action from the fourth quarter of 2019 and clears the October high (1.3383).
  • However, recent price action in USD/CAD warns of range bound conditions as the break of the descending channel formation fails to generate a test of the April high (1.4298), with a break/close below the Fibonacci overlap around 1.4010 (38.2% retracement) to 1.4040 (23.6% retracement) bringing the monthly low (1.3855) on the radar.
  • Next area of interest comes in around 1.3810 (50% retracement) to 1.3830 (100% expansion) followed by the 1.3730 (78.6% expansion) region.

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— Written by David Song, Currency Strategist

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