The Canadian dollar, which started the week quite buoyantly, is now trying to resume ground after the central bank's decision to maintain the current monetary policy. The loonie stumbled following the results of the meeting. At first, it soared to new heights but later held its rise.
The loonie reacted negatively to the decision of the Bank of Canada to keep the benchmark rate and quantitative easing (QE) programs unchanged. Notably, the regulator left the interest rate at the current level of 0.25%, which was in line with forecasts. At the same time, it maintained its quantitative easing program at a target pace of C$2 billion ($1.6 billion) per week
Analysts attributed the weakness of the Canadian dollar not only to the Bank of Canada's policy decision. The short-term decline in CAD is caused by uncertainty over the economic recovery in the country. However, the outlook of the Bank of Canada remains positive as key macroeconomic indicators, primarily in terms of employment, consumption, and production investment, are showing signs of expansion.
This is why the dynamic of the loonie is rather mixed. Despite the fact that it has enough strength to rise, its growth is limited by the regulator's policy decision. On Wednesday, the USD/CAD pair managed to gain bullish momentum. This week, there was an increase in long positions on the Canadian dollar. However, shortly after, bulls started running out of energy. On Thursday morning, the USD/CAD pair was trading near 1.2698, sometimes rising to 1.2700. At the beginning of the day, it added 0.18% and later tried to consolidate above that level.
On the chart, the golden cross has formed. It appears when the 50-day moving average crosses the 200-day average from the bottom up. In June of this year, the pair suddenly broke the resistance level in the form of a 50-day moving average, entering the support zone. As for the 200-day average, it is an indicator of a long-term trend. According to preliminary estimates, this line is also ready to break through the resistance zone and reach the support level in September. Experts are confident that bulls will push the pair to the 1.3000 level.
The normalization of the monetary policy contributes to the expectation of the national currency's further increase. Economists believe that the reduction of weekly asset purchases under the QE program to $2 billion and the possibility of raising the rate in the second half of 2022 may somehow facilitate economic growth. Analysts point out that the reason for the QE reduction may be the high level of inflation (about 4%), which exceeds the target level of 2%.
The next important macroeconomic report that may affect the dynamics of the Canadian dollar is the labor market data, which is due on Friday, September 10. If the reading turns out to be strong, bulls with take the upper hand. The upbeat data on the labor market will increase expectations of an earlier reduction in the QE program. The Bank of Canada may trim the weekly asset purchases by C$1 billion. This is a bullish factor for the Canadian dollar. If so, it is recommended to keep short positions on the USD/CAD pair.
The regulator expects the economy to recover by the end of 2021 and in the first half of 2022. Although the fourth wave of COVID-19 and long-term problems with the supply of goods pose significant risks. However, the Bank of Canada is confident that the surge in inflation is temporary and will not hammer further economic revival.
