Hot Features
Premium
Register for streaming realtime charts, analysis tools, and prices.
USDCAD soared on Wednesday as the Bank of Canada turned dovish. Until recently, the Bank has maintained a hawkish bias and left rates unchanged despite other central banks cutting rates in 2019. Yet on January 22, they turned dovish causing the USDCAD to spike higher by 86 pips.
The important output gap is said to be wider than the central bank projected in October. The output gap measures the difference between actual and potential GDP, with the latter being estimated by the bank. If the output gap is negative then that means that there is deflationary pressure as the economy is not growing at its potential, while if the GDP gap is above its potential then inflation will tend to gain. Effectively, what the bank said today is that the economy is probably not growing at its potential.
While the Bank of Canada perceives that the output gap has tuned more negative, they see inflation near the two percent target as a sign that the economy is operating at its potential. However, I note that if inflation starts to drop unexpectedly, then that could be a sign that the economy indeed has moved away from its potential and the Bank of Canada might get ready to reduce interest rates to support the economy. It is important to keep an eye on the labor market and inflation figures in the next few months.
As for the USDCAD, the price has reverted back to the triangle that dominated the price from July 2019, and the price might continue to rise. However, trading the bullish side of this pair is not interesting as I think the price might start to oscillate when the dust settles, instead, I would focus on another breakout from the pattern. If the price manages to slide below the January 16 low of 1.3030, then that will be the second attempt to breakdown, and per the triangle pattern, the price might be able to reach the 1.2761 level following a successful breakout.
Written by Alejandro Zambrano, Chief Market Strategist at ATFX UK.
Check out Alejandro’s author profile on InvestingCube for more analysis.
USDCAD Daily Chart
