Bank of Canada Makes the Loonie a Favorite

Despite the mixed dynamics of oil, the Canadian dollar strengthened against its US namesake by more than 6% in the last two months.

At a time when other central banks are only hinting normalization, the BOC is ready to take the path of monetary tightening.

The dynamics of inflation and overnight rates of BoC

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Source: Trading Economics.

At the same time, talk about the temporary nature of CPI slowing has become more frequent. This was mentioned by the heads of the Federal Reserve and the ECB, so why is the idea not supported by everyone else? In addition, the Bank of Canada notes a reduction in excess capacity in the local economy and acknowledges a high debt of households (about 170% of disposable income). Meanwhile, the declining risks of introducing a tax in the United States border and the revision the terms of agreements within NAFTA frees the hands of the central bank.

The important factor will not be an increase in the overnight rates, as it is already priced in the quotes of "loonie", but the comments of Stephen Poloz. Markets expect that policymaker will not stop at this and before the year-end will take another step ( the odds of such an outcome is estimated by derivatives to be at 70%). Investors trying to read between the lines will try to determine whether the tightening of monetary policy will be a long-running idea or the BOC's goal is to bring the rate to the 2015 level, after which there will be a prolonged pause. On the first case, one should not count on a deep USD/ CAD correction. In the second case, the rollback may be more significant. The reason is profit taking on the background of the principle of "sell on rumors, buy on facts."

It is impossible to rule out the possibility of maintaining the old parameters of the monetary policy of the Bank of Canada, even though it looks scanty. However, such scenario will result to a sharp decline of the "loonie" due to dashed hopes for a monetary tightening.

Technically, after reaching the target by 113% of the "Shark Pattern", it increased the probability of correction of USC/CAD in the direction of 23.6%, 38.2% and 50% of the CD wave within the transformation of the model above at 5-0. Thus, the key resistance levels are located near the marks 1.308 and 1.3215. The inability of the bulls to break above will be a signal to open short positions.

USD / CAD, the daily chart

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The material has been provided by InstaForex Company - www.instaforex.com