Will the Bank of Canada need to sing the dovish tune soon?

Market Analysis /
20 Feb 2019

The info so far...

  • The sharp fall of gas price in the last quarter brought the country inflation rate down from the high of 3% to a low of 2%.
  • The Bank of Canada raised the interest rate to 1.75 basic point for the fifth time in the last October, and it is likely to wait and see how the effect of the recent hikes first before deciding further on the next action.
  • Series of bad retail sales data indicate the lack of spending from the general public and the potential overall decline of the health of the economy.
  • West Texas Intermediate (WTI) crude oil is making three-month high recently on the news on the sanction of Venezuelan oil. It is the only factor that is supporting the bullishness on the Canadian (Bearish on USD/CAD).

Due to the massive monetary expansion in the world economies since 2008, Canada also enjoyed the prosperity with the higher stock price, low unemployment rate, and nominal inflation. During these periods, we also witness the explosive rise of Canadian housing markets that spurs on the tremendous demand in the Canadian dollar. In a ten years span, the bank of Canada even managed to raise the interest rate to 1.75%. The best thing of all is the meager unemployment rate. It managed to go as low as 5.6%; the lowest since the 1990s.

But moving forward, Canada has been experiencing deep slow down on retail sales with a relatively low inflation rate in recent months. The retail sales data is in the slump since mid-2018, and it had gone negative last month. If the condition gets worse, Canada unemployment might spike up in the coming months, and it will lean towards more economic slowdown.

Another major data/indicator that the traders should pay attention is the housing index of Canada. The Canadian housing market had enjoyed an extraordinary boom for the past few years, thanks to the massive foreigners’ purchases. But lately, the data (Canada Housing Price Index) fails to make a new high for the past six months. If the number starts to fall, the turmoil in the housing market can bring negative ripple effect to the whole economy and the strength of the Canadian dollar.

So, it is very clear that official from the bank of Canada will be very careful about raising the further interest rate. Since inflation is on the low side as mentioned above, they may even consider lowering back the interest rate (or) introducing a monetary expansion mechanism.

From the technical analysis (TA) point of view, the Loonie (USD/CAD) is on the slight uptrend using 1.271 and 1.3 as swing support levels. Currently, the momentum is under the bullish influence as we had a strong bullish engulfing candle two weeks ago. If the bullish momentum is to continue, 1.357 will be a key level to watch. Overall, USD/CAD is in the healthy uptrend so far with the series of higher highs and higher lows.

On the flip side, if the price starts to break below the nearest swing support of 1.309, 1.285 could be the next strong supportive region.

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