10.09.202010:42 Forex Analysis & Reviews: USD/CAD: What was the Bank of Canada silent about?

Yesterday, the Canadian dollar received support from the Bank of Canada. And although the September meeting turned out to be something to ignore, the USD/CAD bears reacted positively to its results. In fact, what was said is not important, but what was not said by the members of the Canadian regulator. Before this meeting, quite disappointing rumors circulated in the market, which exerted background pressure on the Canadian currency. But the Central Bank did not begin to implement negative scenarios, after which the CAD increased in price throughout the market. Moreover, it returned to the 31st figure together with the dollar, where it continues to drift at the moment. However, this is just a correction – the bears need a weak US dollar for the downward trend to continue, while the dollar expects tomorrow's inflationary release.

Now, let's start with the results of the meeting of the Canadian regulator. The September meeting really turned out to be a "passing" one. The Central bank left all the parameters of monetary policy unchanged, and the rhetoric of the accompanying statement was familiar. Moreover, the members of the regulator stated that the Canadian economy still needs large-scale support from them, so the Central Bank will keep the interest rate at the current level and will continue to buy assets in current volumes "until the economic downward reversal is overcome and inflation reaches the target of two percent."

In general, the rhetoric of the accompanying statement was balanced. On the one hand, members of the regulator acknowledged that the Canadian economy (like the global economy) is recovering in line with the July forecasts. Moreover, the economic recovery in the third quarter is even faster than forecast in July. The Canadian Central Bank also noted the growth of key US macroeconomic indicators. However, the Bank of Canada predicts a "long and weak phase of economic recovery" amid growing uncertainty and systemic problems. In particular, the inflation rate in the short term will remain below the target level based on the Central Bank's estimates. They also noted that emerging economies are showing mixed recovery dynamics, which indicates the strength of the coronavirus crisis.

In other words, the Canadian regulator voiced a very balanced rhetoric, which was almost the same from the rhetoric of the previous meeting. Nevertheless, CAD reacted positively to the results of the September meeting. Although, in particular, it has risen in price not because of the voiced rhetoric, but due to the fact that many formulations were not said, contrary to the forecasts of many experts.

It is worth recalling that about a week and a half before the September meeting, the Deputy Governor of the Bank of Canada, Carolyn Wilkins, announced that the Central Bank could duplicate the strategy of the American regulator. According to her, alternative instruments of monetary policy "may include targeting average inflation, targeting the price level, a dual mandate to increase employment and control inflation, and targeting nominal GDP." And although she said this hypothetically, the result came shortly: the price of the Canadian dollar began to actively fall right after the results of the meeting was announced.

In this case, we can understand traders, since Fed's new strategy has significantly delayed the possible date of the interest rate increase. And although we are not talking about three percent inflation, the regulator still raised the bar. If exceeded, members of the US Central Bank will return to the issue of increasing the rate. At the same time, if such a strategy was adopted by members of the Canadian regulator, the USD/CAD pair would now be testing the resistance level of 1.3390 (the lower limit of the Kumo cloud on the daily chart). But the Bank of Canada decided not to rush to such decisions, and this fact had a positive impact on the ''health" of the Canadian dollar.

Thus, CAD remained afloat and in context, the USD/CAD pair is now completely dependent on the dynamics of the US dollar. Today, traders will monitor the political battles in the Senate during the US trading session, where they will put to the vote the anti-crisis bill of the Republicans, in the amount of 500 billion dollars. The Democrats are not expected to vote for this document, but, according to reports, many Republican senators can also take part. This fact may be a blow to the dollar, which will allow the USD/CAD bears to increase their pressure.

From the point of view of technical analysis, the pair on the daily chart is on the middle line of the Bollinger Bands indicator, which means it is "at a crossroads." At the moment, it is too early to open sales: bears of USD/CAD pair need to consolidate not only below this line (1.3140), but also below the Tenkan-sen line (1.3125), in order to open the way to the main support level located at 1.3030.