USD/CAD Bear-Flag Continues To Unfold As Fed Drops Hawkish Guidance

USD/CAD trades to a freshly monthly-low (1.3119) as the Federal Reserve removes the hawkish forward-guidance for monetary policy, and the exchange rate stands at risk for a larger correction as a bear-flag formation unfolds.

Image of daily change for major currencies

USD/CAD BEAR-FLAG CONTINUES TO UNFOLD AS FED DROPS HAWKISH GUIDANCE

Image of daily change for usdcad rates

Fresh remarks from the Federal Open Market Committee (FOMC) suggest the benchmark interest rate will sit at its current range of 2.25% to 2.50% even though U.S. New Home Sales jumps 16.9% in November, and the Fed may start to taper the $50B/month in quantitative tightening (QT) as officials note that ‘the normalization of the size of the portfolio will be completed sooner, and with a larger balance sheet, than in previous estimates.’

The Bank of Canada (BoC) may follow a similar path to its U.S. counterpart amid the weakening outlook for the global economy, and the central bank may larger endorse a wait-and-see approach to the next meeting on March 6 as the central bank’s ‘revised forecast reflects a temporary slowing in the fourth quarter of 2018 and the first quarter of 2019.’

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Image of BoC interest rate

Governor Stephen Poloz may sound less-hawkish over the coming months as ‘CPI inflation is projected to edge further down and be below 2 percent through much of 2019,’ but it remains to be seen if the BoC will remove the hawkish forward-guidance as the ‘Governing Council continues to judge that the policy interest rate will need to rise over time.’ With that said, the current environment may foster a larger correction in USD/CAD as the BoC continues to prepare Canadian households and businesses for higher borrowing costs, and recent price action raises the risk for further depreciation in the exchange rate as bear-flag formation unfolds.

USD/CAD DAILY CHART

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Image of usdcad daily chart

  • Keep in mind, broader outlook for USD/CAD remains constructive following the break of the June-high (1.3386), but the failed attempts to close above the 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion) region raises the risk for a larger correction as both price & the RSI snap the bullish formations from October.
  • The recent decline appears to be stalling ahead of the 200-Day SMA (1.3117), but a close below 1.3130 (61.8% retracement) opens up the Fibonacci overlap around 1.2980 (61.8% retracement) to 1.3030 (50% expansion), with the next area of interest coming in around 1.2830 (38.2% retracement).

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