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March 10, 2021

USD/CAD Deep Dive: Are We Going To Continue Pushing Lower?

Bart Kurek

Price action has been pretty much one-directional since the initial Covid-19 outbreak in March 2020 as the pair is now on an eleven-month bearish run, consistently creating new lows and now nearing 1.25, a significant psychological level.

Looking at the daily timeframe chart above, major psychological levels are marked by the blue horizontal lines. Price has been forming chart patterns like the descending triangle at the top before breaking through each level.

Currently, price is right at the channel's top and consolidating around it. As 1.25 is the lowest price has reached so far, we are now asking ourselves whether this bear run could be nearing an end or if price will continue pushing lower.

We also have this bearish order block (OB) visible between 1.272 - 1.276, an area to potentially catch a sniper reversal. Most retailers will be going short right at the channel's top, at around 1.269.

We know that banks manipulate price, and therefore I am expecting price to break out of this channel's structure once there is enough liquidity at that OB, until most retailers will change bias, where banks will then reverse and most likely continue pushing to the downside.

On Wednesday the 10th of March at 15:00 GMT, we have the BoC Rate Statement, which is the primary tool the BoC uses to communicate with investors about money supply and interest rates in Canada to meet macroeconomic objectives such as controlling inflation, consumption, growth, and liquidity. Overall, they discuss the economic outlook and offer clues on the outcome of future decisions.

A source from the investment banking group MUFG stated their expectations for the BoC meeting today. They stated "The BoC is expected to acknowledge the stronger growth outlook. Growth in Q4 was twice as strong as the BoC had expected. It is encouraging expectations that the BoC will eventually bring forward plans to tighten policy… The BoC will face a difficult challenge if it wants to dampen the pace of the move higher in Canadian yields in light of improving fundamentals. The BoC is likely to reiterate that it does not plan to raise rates until 2023 at the earliest. The higher price of oil and favourable yield spread developments continue to favour a stronger CAD. It will be hard for the BoC pushback this week".

The Canadian Dollar's primary drivers include the monetary policy. Expectations for policy tightening will likely support CAD, while expectations for policy easing will likely pressure CAD.

The next main driver is Oil, which is Canada's largest export, accounting for over 17% of Canada's exports. As such, CAD is highly correlated with oil prices; strengthening when oil prices rally and weakening when oil prices fall.

We have gathered here that as growth in Q4 was twice as strong than the BoC had expected, it is likely the BoC will bring forward plans to tighten policy, which we know will support and strengthen the CAD. This further supports our bias on USD/CAD as it is likely price will continue pushing lower, breaking through further psychological levels.

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