CAD treading lightly ahead of BOC

The Canadian dollar has traded quietly so far this week as the economic calendar has been light. The remainder of the week is busy, with the Bank of Canada policy meeting later today and the September GDP report on Friday. USD/CAD is currently trading at 1.2419, up 0.24% on the day.

Will Bank of Canada taper?

The BoC has shown the markets that it is serious about tightening policy as the economic recovery finds its footing. The BoC was the first major central bank to trim bond purchases and is widely expected to trim again, reducing bond purchases from CAD 2 billion to CAD 1 billion.

The Canadian dollar has soared in October, with several drivers for the upswing. Domestic data, such as the falling unemployment rate, a rise in retail sales and high inflation. Investor risk appetite has been moving higher, and the jump in oil prices has been boosted the loonie, as Canada is a major oil producer.

The BoC could end its bond purchase scheme before the end of the year, but it remains unclear what bank policy makers plan to do about rate policy. No change is expected to the current rate of 0.25%, but will today’s meeting hint at a rate hike sometime next year? If so, USD/CAD could test some multi-month lows. Conversely, if the BoC is silent about rates, that could generate some disappointment and send USD/CAD higher. Investors will also be interested in what the bank has to say about the surge in inflation. September CPI hit 4.4% (YoY), much higher than the bank’s inflation target of 2%. Like the Federal Reserve, the BoC continues to insist that inflation, which is running way above the bank’s target of 2%, is transitory, but that stance is increasingly being questioned, with no signs that inflation will ease up anytime soon.

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 USD/CAD Technical

• USD/CAD is testing resistance at 1.2422. Above, there is support at 1.2475
• There is support at 1.2302, followed by 1.2235

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