SIA Weekly: "In Light of the BoC's Decision..."

SIA Weekly: "In Light of the BoC's Decision..."




by SIACharts.com

In light of the Bank of Canada’s (BoC) decision on Wednesday to leave the benchmark interest rate unchanged, we will look again at the USDCAD chart which has recently moved into a column of X’s after hitting a bottom back in early September coinciding with the surprise rate increase from the BoC last month. To keep on the topic of currencies, we will also revisit the US Dollar Index to see how the USD has fared compared to a basket of major currencies around the world.

United States Dollar/Canadian Dollar (USDCAD)

The Bank of Canada decided to hold the overnight rate at its current 1.00% level on Wednesday after having already raised rates twice in 2017 back in July and September. These were the first two rate hikes in two years after leaving rates unchanged through the second half of 2015 and all of 2016. While this year’s rate increases came amid signs that the economy was heating up, the BoC did take a little more cautious tone citing the recent strength in the CAD has ever so slightly slowed inflation - although they still project that inflation will rise to 2 per cent in the second half of 2018. The bank announced that “the current stance of monetary policy is appropriate [for current market conditions]… While less monetary policy stimulus will likely be required over time, we will be cautious in making future adjustments to the policy rate.” The next Bank of Canada meeting is December 6, 2017.

While many analysts did not expect a rate increase, some currency traders were caught off guard with the USDCAD strengthening over a penny in Wednesday’s trading to close at 1.28, up 1.00% for the day. Since last discussing the USDCAD we have seen a new column of X’s form in favor of the USD after finding a bottom at the 1.22 support level. Should this trend continue there will be some strong levels of resistance to watch between 1.2854 and 1.30. A break above this could see strength to the 1.35 level. Support as mentioned above looks to come at 1.22 and below this around 1.18. With an SMAX of 2/10, USDCAD is still showing little near-term strength versus the asset classes.

 

US Dollar Index Continuous Contract (DX2.F)

To keep with our focus on currency, next we will look at the US Dollar Index which is a measure of the value of the United States dollar relative to a basket of foreign currencies. This basket includes the following currencies: Euro (58%), Japanese yen (14%), Pound Sterling (12%), Canadian dollar (9%), Swedish krona (4.2%), and Swiss franc (3.6%).

While we have seen some recent strength in the USD versus the loonie, this hasn’t turned into obvious broad USD strength with DX2.F showing a slight bounce from the September lows, however, this has not formed a new column of X’s in the chart. Turning to the Point and Figure chart, the next obvious level of support looks like it comes in around 90 and below this at 86.54 and 83.99. If this trend reverses into X’s in favor of the USD, resistance to watch would be the three-box reversal mark, 94.64, then above at 100. With an SMAX of 1 out of 10, DX2.F is not showing near term strength versus the asset classes.

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