06.04.202213:45 Forex Analysis & Reviews: USD/CAD: main drivers for Canadian dollar and USD/CAD

Following the results of the regular meeting held early last month, the Bank of Canada decided to increase the interest rate by 0.25% (up to 0.50%) and opted for further increases. The Bank of Canada now expects GDP and Consumer Price Index (CPI) growth in Q1 this year to be stronger than previously expected. Bank executives also acknowledged that uncertainty caused by Russia's special military operation in Ukraine could dampen economic growth and boost inflation.

CAD reacted rather moderately to the decision of the Bank of Canada, including the fact that it was widely expected and was taken into account in the CAD quotations.

The strengthening of the Canadian dollar began later, in the second decade of March, amid a sharp increase in oil prices, which is the main export commodity of Canada, and other energy products.

Currently, the USD/CAD pair is trading near 1.2496, having declined after attempting to rise above 1.2510. Through this level passes an important short-term resistance of 1.2510 and major long-term support (MA 200 on the monthly chart). Therefore, a confirmed breakthrough of the local support at 1.2460 and a further decline will confirm the USD/CAD establishing the long-term bear market.

Although the Fed is planning six more interest rate hikes this year, Canada's economy is likely to be one of the most resilient to the damaging effects of the ongoing negative events in the global economy. Meanwhile, the Bank of Canada has also started its monetary policy tightening. Economists say they expect the Bank of Canada to take three to five more rate hikes this year and then move on to quantitative tightening.

Against the background of military actions in Ukraine and large-scale sanctions from the West against Russia, many oil market analysts expect a further increase in energy prices, which will continue to support the Canadian dollar. Canada is the largest oil exporter, and the share of oil and oil products in the country's exports is about 22%.

Today, CAD may be supported by the weekly report of the US Department of Energy at 14:30 GMT. Oil market analysts project a 2.056 million barrel decline in US oil reserves.

Market participants who monitor CAD quotations and USD/CAD trends will pay more attention to Statistics Canada's monthly employment report for March, which will be released on Friday at 12:30 GMT. The number of employed people rose sharply by 336,600 in February, after falling by 200,100 last month, although economists had expected a rise of only 160,000. The unemployment rate fell by 1% to 5.5%, while market forecasts suggested a decline to 6.2%. Average hourly earnings rose by 3.3% from a previous increase of 2.4%. The March report suggests further improvement in the Canadian labor market. Economists forecast another drop in the unemployment rate to 5.4% and an increase in the number of employed by 80,000.

The labor market data, along with GDP and inflation data, are crucial for the central bank in its monetary policymaking. An improvement in the data is a positive sign for the CAD, as it shows positive momentum in the Canadian economy and justifies the central bank's tougher stance on monetary policy tightening. The Bank of Canada's next interest rate decision is scheduled for April 13, while today market participants will study the minutes from the March FOMC meeting. They are scheduled for publication at 18:00 (GMT) and may include additional information on the date when the Fed's balance sheet reduction starts, as well as the pace, structure, and methods of this process, and the sentiment among Fed policymakers on the key parameters of the central bank's monetary policy.

Lael Brainard, a member of the Federal Reserve Board of Governors, may take the position of vice-chair of the Fed. On Tuesday, she said that the central bank is determined to work to slow down inflation by reducing its $9 trillion balance sheet. That process could be announced as early as the May meeting.

Expectedly, the US dollar index rose to 99.73 today, which is the highest reading since May 2020.

If the minutes point to less aggressive cuts, the US dollar may weaken, economists say.

Technical analysis and trading recommendations

The USD/CAD pair is trading in a narrow range today on the eve of the March FOMC meeting minutes publication, retaining the potential for further downside.

The pair maintains the bear market, trading below major resistance levels of 1.2365 (EMA200, EMA144, EMA50 on the daily chart), and 0.2845 (EMA200, EMA144 on the weekly chart).

The downtrend prevails, making short positions more preferable.

A breakthrough of the support level at 1.2460 (swing lows and the bottom line of the uptrend channel on the daily chart) will signal the accumulation of short positions.

The alternative scenario suggests that the first signal for the resumption of long positions will be a breakthrough of resistance at 1.2510. An important short-term resistance level (EMA200 on the 1-hour chart) and a major long-term 200-day moving average on the monthly chart, which separates the long-term bull market from the bearish one, pass through this level. However, to open long-term positions we should wait for the USD/CAD pair to rise above the resistance at 1.2635. A breakthrough of resistance at 1.2845 is likely to establish the long-term bull market.

Support levels: 1.2460, 1.2400, 1.2310, 1.2165, 1.2050

Resistance levels: 1.2510, 1.2611, 1.2635, 1.2700, 1.2800, 1.2845, 1.2900

Trading scenarios

Sell Stop 1.2470. Stop-Loss 1.2520. Take-Profit 1.2460, 1.2400, 1.2310, 1.2165, 1.2050

Buy Stop 1.2520. Stop-Loss 1.2470. Take-Profit 1.2600, 1.2635, 1.2700, 1.2800, 1.2845, 1.2900, 1.3000