USD/CAD – Cautious Trading Ahead of Fed Statement

USD/CAD is showing little movement in Wednesday trading, as the pair trades in the mid-1.02 range. Today’s spotlight is on the US Federal Reserve, which will issue a Monetary Policy Statement and set the benchmark interest rate. In today’s other release, Crude Oil Inventories shocked the markets with a decline of 1.3 million. This was way off the estimate of 1.8 million, and marked the indicator’s worst reading in 2013. There are no Canadian releases today. 

The epicenter of this week’s financial news is, of all places, Cyprus. One of the smallest members of the Eurozone, the island country’s economy is struggling. The Cypriot government thought it had concluded a bailout agreement (worth 10 billion euros) over the weekend with the EU and the IMF. However, a controversial provision in the agreement has enraged Cypriots and sent the currency markets spinning. Under the terms of the bailout package, deposit holders in Cypriot banks would be levied with a one-time tax, between 6.7% and 9.9%, depending on the size of the deposit. This tax is intended to raise 5.8 billion euros, which would be a condition to receiving the 10 billion euro bailout. There was a run on bank machines, as Cypriot banks were closed for a holiday. Taxing bank deposits is unusual, and there is a fear that other debt-ridden countries, such as Spain, could face bank runs as well. The drama continued on Tuesday, as the Cypriot parliament voted overwhelmingly against the bailout deal, despite the government’s pleas that rejecting the agreement could lead to a bank collapse. In an attempt to contain the fallout, Eurozone finance ministers are likely to meet today to discuss options following the vote in parliament.

In Japan, the powerful Bank of Japan has replaced governors, and the move is sure to have significant ramifications for the Japanese economy and currency. Haruhiko Kuroda, the incoming governor, is a strong proponent of monetary easing, and has been called a “dream choice” for Prime Minister Shinzo Abe, who wants to see further monetary easing in order to eliminate deflation and increase government spending. Abe has been a sharp critic of Shirakawa, the outgoing governor, who did not favor aggressive monetary easing. Kuroda has set a goal of 2% inflation within two years, and is expected to introduce additional easing, which will likely weaken the yen. The Japanese currency has already lost 20% against the US dollar, which has been a boon for Japanese exports. Although economic indicators continue to point to deflation in the economy, GDP was up slightly in Q4 of 2012, raising hopes that the government’s aggressive easing policy is starting to pay dividends.

Overshadowed by the crisis over the Cyprus bailout, the US Federal Reserve wraps up a policy meeting on Wednesday. The Fed is expected to maintain ultra-low interest rates, but the markets will be anxiously awaiting what the Fed decides to do regarding the current round of QE. With the US recovery looking stronger and unemployment dipping lower, there has been speculation that the Federal Reserve might wind down or modify its asset purchase program. However, Fed head Bernard Bernanke and other senior officials have said the current round of QE will continue until the US recovery deepens. If the Fed surprises the markets, we can expect some volatility from USD/CAD.

USD/CAD for Wednesday, March 20, 2013

1.0256 H: 1.0276 L: 1.0238

USD/CAD Technical

USD/CAD is trading in a narrow range in Wednesday trading, as the pair trades in the mid-1.02 range. The proximate resistance and support levels (R1 and S1 above) remain intact. The pair is receiving support at 1.0229. This is a weak line, and could be tested if the Canadian dollar shows any strength. The next support line is at 1.0157. On the upside, there  is resistance at 1.0282. This is followed by resistance at 1.0361, which has held steady since June 2012.

• Current range: 1.0229 to 1.0282

Further levels in both directions:

• Below: 1.0229, 1.0157, 1.01, 1.0041 and 1.00
• Above: 1.0282, 1.0361, 1.0446 and 1.0523

OANDA’s Open Position Ratios

Like other currency pair ratios, we are seeing a shift in direction in the USD/CAD ratio. In Wednesday trading, the ratio is pointing to movement towards long positions. This is not reflected in the current movement of the pair, which finds itself boxed into a narrow range. However, if this activity continues in the ratio, it would signify an expectation that the US dollar will break out and post gains against the loonie.

The US dollar pushed higher against the Canadian currency on Tuesday, taking advantage of strong US housing data and disappointing Canadian manufacturing numbers. The pair has since leveled off, but we could see more movement after the US Federal Reserve makes a Monetary Policy Statement. The markets are anxious to see if the Fed will continue the current round of QE, and any changes would likely impact on the direction of USD/CAD.

USD/CAD Fundamentals

• 14:30 US Crude Oil Inventories. Estimate 1.8M. Actual -1.3M
• 18:00 US FOMC Economic Projections
• 18:00 US FOMC Statement
• 18:00 US Federal Funds Rate. Estimate <0.25%
• 18:30 US FOMC Press Conference

*Key releases are highlighted in bold

*All release times are GMT

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.