Canadian dollar strengthens on hawkish statement from BoC

Lower than anticipated unemployment claims in the US and sharp decline in the price of crude oil fuelled a rally in the USD/CAD pair in the past week. The pair, which hit a high of 1.3470 yesterday, is trying to consolidate as the price of crude oil threatens to move down lower.

However, we anticipate the Canadian dollar to bounce back in the days ahead due to reasons provided below.

The Bank of Canada expressed optimism about the economy in its monetary policy report issued on Tuesday.

The Central bank pointed out that the recent economic data is stronger than anticipated and that would absorb the excess capacity in the first half of 2018. The BoC left the benchmark interest rates unchanged at 0.50%. However, the statement from the BoC is considered to be hawkish.

Financial Times

A report from the American Petroleum Institute indicated that the crude supplies declined 840,000 barrels last week. The reported figures were lower than Bloomberg’s consensus estimates of 1.4 million barrel drop in supplies. The contrasting data brought about a sharp fall in the price of crude oil. However, it should be noted that oil exports from Saudi Arabia had fallen to a 21-month low of 6.95 million barrels a day in February.

Even the stock piles at Oklahoma, the largest oil storage hub in the US, had fallen by 570,000 barrels last week.

The Saudi energy minister Khalid Al-Falih had stated that the oil producers are very well complying with the pledged production cut and the recent increase in the supplies is mainly due to refinery maintenance. Thus, we can expect the crude to bounce back quickly. The Canadian dollar would naturally strengthen with an increase in the price of crude oil.

In the meanwhile, the US President Trump had opined that the US dollar is getting stronger, and suggested the Fed to keep the interest rates lower. Additionally, the weak non-farm job additions of 98,000 in March, against market’s expectation of 174,000, and lower than last month’s addition of 215,000 has raised doubts about a rate hike in June.

Trump’s failure to repeal Affordable Care Act, generally referred to as ‘Obamacare’, has also created an overall negative sentiment about the US dollar. Thus, we expect a bearish reversal in the USD/CAD pair.

The chart indicates an established resistance for the USD/CAD pair at 1.3580. The RSI indicator is in the overbought region. Thus, a trader can expect a trend reversal in the USD/CAD pair to begin at 1.3580 levels.

To benefit from the predicted decline, going short in the USD/CAD pair would be the ideal option for a currency trader. The short position can be created near 1.3580, with a stop loss order above 1.3680. A take profit order can be placed near 1.3230.

By investing in a put option, a trader can reap rich rewards from the USD/CAD pair’s decline. The option should have a validity period of one week. Additionally, for higher chances of success, the contract should be preferably purchased when the pair trades near 1.3580.