Yesterday, the Canadian dollar paired with the American currency tested the 35th figure for the first time since January of this year. The catalyst for the northern impulse was the April meeting of the Bank of Canada and the results were announced last night. The regulator voiced a rather pessimistic position while reducing its forecasts for the growth of the country's GDP but most importantly, the Central Bank refused to further tighten monetary policy, at least in the foreseeable future. The disappointing results of yesterday's meeting laid the foundation for the northern trend of the USD/CAD pair at least to the first resistance level of 1.3610 (the upper line of the Bollinger Bands indicator on the weekly and monthly charts).
It is worth noting that the Loonie took a course to the north last week, despite fairly good data on inflation. The March consumer price index rose to 1.9% while the core inflation on a monthly basis unexpectedly sank to 0.3%, with a growth forecast of up to 0.7%. In annual terms, the core inflation index rose to 1.6% with a forecast of 1.3%. In other words, the release was very mediocre, but not catastrophic. Nevertheless, the Canadian dollar reacted violently to this publication after short-term growth and collapsed throughout the market.
The fact is that the Bank of Canada at its previous March meeting hinted rather clearly at the end of the interest rate increase cycle. However, the regulator voiced its position in two ways, wherein many experts in their assessments did not rule out an increase in the rate in the second half of this year. Yet, the uncertain inflation growth actually put an end to this issue, especially against the background of other macroeconomic reports. Yesterday, the Canadian Central Bank only confirmed the concerns of traders.
First of all, the Bank of Canada has revised its forecasts for the growth of the national economy, and quite significantly. Thus, the forecast for GDP growth in the last quarter of last year was reduced to 0.4% from the previous 1.3% and in the first quarter of this year, it resulted to 0.3% from the previous 0.8%. The forecast of economic growth in the current year was also revised downwards from 1.7% to 1.2%. In 2020 and 2021, annual GDP growth will be about two percent. Stephen Poloz also clarified that the growth of the Canadian economy in the first half of this year will probably be even weaker than the forecasts made, while key indicators are expected to recover in the second half of 2019.
Also, the head of the Canadian Central Bank focused on the slowdown in the housing market and consumer activity. In his opinion, these factors played a significant role in slowing the economy as a whole. It is worth noting that the average cost of housing over the past year decreased by almost six percent, in particular, due to lower demand and more stringent and complex rules for obtaining a mortgage. The remaining structural elements of GDP also show negative dynamics. For example, the volume of investments in the Canadian economy declined by more than 3%, investment in real estate by 4.9% and new projects by 5.5%. The dynamics of the industrial sector are also disappointing, especially against the background of an uncertain situation in the oil market.
A significant drop in consumer activity is also a serious problem. The basic retail sales index was in the negative area for four months from December to March. Only in April, it was able to exceed the zero value. In addition, the increase in full-time employment has slowed significantly while part-time employment is gaining momentum. This is reflected in the dynamics of wage growth in the country and the dynamics of household spending, which have been falling for the second quarter in a row.
Thus, the pessimism of the Canadian regulator is fully justified. In my opinion, the Bank of Canada is unlikely to decide to tighten monetary policy this year even if the country's GDP growth accelerates in the second half of the year. Consequently, the Canadian dollar has lost a significant trump card for its growth. Now, the downward dynamics of the USD/CAD pair will only be caused by the weakness of the US currency. In this context, today's release of data on US GDP growth is important. If this indicator disappoints the traders, a corrective pullback to the base of the 34th figure is possible for the pair. Otherwise, Loonies will test the 35th figure today, heading towards the main upward target of 1.3610.
From a technical point of view, further growth is also expected. On the daily chart, the price is testing the upper line of the Bollinger Bands indicator while on the weekly chart, it is between the middle and upper lines. This indicates that the upward movement is the priority. In addition, on D1, the pair is above the Kumo cloud, and the Ichimoku Kinko Hyo indicator has formed a bullish Parade of Lines signal.
The support level is found on the Tenkan-sen line at 1.3401, which coincides with the Kijun-Sen line. On the other hand, the resistance level is at 1.3610 mark, which is the top line of the Bollinger Bands indicator on the weekly chart.
