- BoC is expected to tighten its policy further by cutting its weekly bond purchases by a third.
- With IEA warning of an oil supply crunch, the Canadian dollar is finding support in the rising oil prices.
- Fed Chair’s testimony before the US Congress will offer further cues on the taper talks.
BoC interest rate decision
USDCAD has paise on its rally as all eyes are now on the Bank of Canada’s interest rate decision scheduled for Wednesday. Investors expect BoC to continue tightening its monetary policy as the economy makes significant strides in its recovery. According to Royal Bank of Canada’s Josh Nye, “recent activity data have been in line with the BoC’s April forecasts.”
Economists expect the central bank to cut its weekly bond purchases by a third to C$2 billion ($1.6 billion). Besides, its overnight interest rates are expected to remain at 0.25%. Traders are already pricing in a rate hike within the next 12 months. This is likely to yield a total of four rate hikes within a span of two years.
If that happens, Canada will be among the advanced nations with the highest policy rates. Notably, tapering asset purchases in today’s interest rate decision will denote the third time that the bank has done so since late last year. the initial tapering took place in October 2020 while the second one was in April 2021.
Crude oil prices
As a commodity currency, USDCAD is largely impacted by crude oil prices. Notably, higher oil prices tend to boost the Canadian dollar. This is especially influential on the USDCAD as about 98% of the Canadian oil exports end up in the US. As such, Canada provides about 43% of the commodity consumed in the US.
At the time of writing, the benchmark for US oil -WTI futures – are on a bullish consolidation pattern along $75. On Tuesday, the American Petroleum Institute (API) indicated that the weekly oil inventory data missed the estimates of 4.3333 million by coming in at -4.079 million barrels. This is in comparison to the prior week’s draw of 7.983 million barrels.
However, crude oil prices remain on an uptrend amid concerns over low supply. In its monthly report released on Tuesday, IEA warned of a supply crunch amid the ongoing deadlock within OPEC+. Besides, a stalemate over the revival of the Iranian nuclear deal has supressed the threat of the country’s oil flooding the global markets.
Investors are now keen on the EIA’s weekly inventory numbers scheduled for release in today’s session. Lower-than-expected numbers re likely to boost crude oil prices while acting as a bearish catalyst for USDCAD.
Fed Chair’s testimony
USDCAD will also be reacting to the highly anticipated Fed Chair’s testimony before the US Congress. On Wednesday and Thursday, Jerome Powell is expected to present the central bank’s semi-annual report on the state of the economy.
Powell is tasked with convincing the lawmakers that the current accommodative monetary policy is the right route to take in the short term. The testimony comes a day after the higher-than-expected CPI data. The core CPI for June came in at 0.9% YoY, which is higher than the forecasted 0.4% and the previous month’s 0.7%.
Subsequently, investors will be keen on whether the Fed still maintains the ‘transitory’ narrative even as the consumer prices rise steadily. Notably, a dovish tone is likely to exert pressure on USDCAD.
USDCAD price forecast
USDCAD is trading sideways ahead of the BoC interest rate decision and Jerome Powell’s testimony. In the previous session, it surged from an intraday low of 1.2442 to a high of 1.2541. at the time of writing, the currency pair was down by 0.01% at 1.2513. On a two-hour chart, it is trading slightly above the 25 and 50-day exponential moving averages.
Based on both the fundamentals and technicals, the outlook is rather neutral. In the near term, I expect USDCAD to continue trading within a tight range. It is likely to find support along the 25-day EMA at 1.2495 with the horizontal channel’s upper border being at 1.2528.
As a reaction to the day’s events, the pair is likely to move lower to yesterday’s low at 1.2443. On the flip side, a bullish breakout may place the resistance level at the psychological level of 1.2600.
