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The Canadian dollar, paired with its US counterpart, has strengthened by almost 400 points in more than a week. Among the major dollar pairs, the Canadian dollar showed the strongest growth rate, despite the flat state of the US dollar index. Today, the USD/CAD pair may strengthen the downward trend, especially if the data on Canadian economic growth surpasses investors' expectations.
On April 21, the Canadian dollar received a downward signal, when the results of the last meeting of the Bank of Canada became known. Before this event, a certain intrigue persisted. Some analysts believe that the Bank of Canada should have announced a reduction in purchases of government bonds to $ 3 billion a week (at that time the pace was $ 4 billion), while other experts say that the Central Bank should only have presented an outline for further actions. The second scenario prevailed among analysts, so when the Canadian regulator implemented the "hawkish" scenario, the Canadian currency noticeably strengthened its position throughout the market – including in a pair with the US dollar.
Commenting on the decision, Governor of the Central Bank of Canada, Tiff Macklem, said that the correction of the volume of weekly stimulus "reflects progress in economic recovery." Based on the updated forecasts, the regulator currently expects to achieve the target level for inflation in the second half of next year. Previously, the Central Bank was guided by 2023. Macklem also said that a temporary surge in inflation is expected in the next few months, but this will be due to the effects of the base. In general, there is a positive growth outlook for the Canadian economy. Here, the regulator also revised its forecasts in the direction of improvement. In particular, Canada's GDP forecast this year was raised from 4.0% (January estimate) to 6.5% (current estimate). The GDP forecast for 2022 was set at 3.7%, and 3.2% (earlier forecast was at 2.5%) for 2023. In an accompanying statement, the regulator said that economic activity in the country has shown "greater than previously expected resilience in the face of the COVID-19." At the same time, the Central Bank has ruled out raising the interest rate in the near future. According to the conclusions of the final communique, the Central Bank firmly intends to maintain the key rate at the lower end of the range until inflation settles steadily in the area of the 2% target level.
In addition, the Bank of Canada's head also noted that further correction of the QE program will take place "smoothly and gradually." At the same time, he emphasized that following decisions will be made based on the results of the analysis of incoming data.
Most likely, this is the key difference between the positions of the Fed and the Central Bank of Canada. The US Fed is voicing "dovish" rhetoric and accordingly, maintains the policy of monetary stimulation, despite the growth of the main indicators of the economy. In particular, the US regulator is ready to "tolerate" too high inflation, which will exceed the target level. In other words, the Fed's position comes down to the fact that it will ignore the sudden growth of key macro indicators in the second half of this year, without worrying about the "overheating" of the economy. Meanwhile, the Bank of Canada 's outlook for the monetary policy will depend on the incoming data.
This is the reason why the US dollar ignores the American macroeconomic reports, even if they are main data. The latest example is yesterday's release on US GDP growth. Traders are well aware that regardless of the dynamics of these indicators, the Fed will maintain its "dovish" position. The opposite situation has developed with the Canadian dollar. Here, the macroeconomic statistics play an important role in determining the pace of further collapse of QE.
Against this background, today's data on Canadian economic growth in February may provoke increased volatility for the USD/CAD pair. Based on preliminary forecasts, the volume of Canadian GDP will rise by 0.5% in monthly terms, against the figure of 0.7% in January. As for annual terms, the indicator is expected to be released around 1.9%. The downward trend of the USD/CAD pair will receive an additional impulse if today's release comes out in the "green" zone.
Technically speaking, the pair on all the bigger time frames (from H4 and higher) is either on the lower line of the Bollinger Bands indicator, or between the middle and lower lines, which indicates that the downward direction is the priority. From H4 to M30 time frames, the Ichimoku indicator has formed a bearish signal "Parade of Lines", when the price is below all the indicator lines, including the Kumo cloud. This signal indicates a bearish mood. The strongest support is set at 1.2200 (lower monthly Bollinger Bands). It is important for sellers to break through this target to be able to consolidate within the range of 1.20-1.22 and indicate further downward prospects. However, it is worth noting that when approaching the level of 1.2200, the pair may slow down and go for a short-term correction.
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