The Canadian dollar could see a pickup in volatility on Tuesday at 9:00 ET as the Bank of Canada is expected to leave rates unchanged at 0.50 percent, according to a Bloomberg News poll of economists.
However, Credit Suisse overnight index swaps are currently pricing in a 52 percent chance of a 25 basis point reduction to 0.25 percent. As it stands, economic conditions continued to deteriorate throughout Q1, as Ivey PMI has held below 50 for the fifth straight month in March, signaling a contraction in business activity, while the unemployment rate climbed to a seven-year high of 8.0 percent. That said, the Canadian dollar’s reaction may hinge more upon the policy bias contained within the Bank’s concurrent press release. Indications that they will leave rates unchanged going forward could send the Canadian dollar spiraling higher, while remarks suggesting that they are open to cutting rates later in the year or pursuing quantitative easing could send the currency lower.
From a technical perspective, USD/CAD is currently testing former support (now resistance) at 1.2392/1.2400 and whether or not we see a break higher may depend on the Bank of Canada's stance tomorrow. Looking to shorter-term hourly and 240-minute charts, RSI is now in overbought territory above 70, suggesting the pair may be due for a retracement lower in the near-term.
Ultimately a surprise rate cut, signs that the Bank of Canada holds a dovish outlook, or comments about quantitative easing could send USD/CAD above noted resistance for a test of the 61.8 percent fib of 1.3065-1.1981 at 1.2647. On the other hand, indications that the Bank will leave rates unchanged going forward could lead USD/CAD back down toward 1.2000. Traders should also keep the link between oil prices and the Canadian dollar in mind, as the correlation between the two is at its highest in at least 10 years.
Source: FXTrek Intellicharts
