BoC Preview: USD/CAD is likely to react significantly higher to a dovish surprise

The Bank of Canada (BoC) is expected to leave its policy unchanged at 0.25% while investors await adjustments to BoC’s asset-buying program. In the view of FXStreet’s Eren Sengezer, a dovish surprise would lift the USD/CAD pair.

BoC set to lower QE purchases

“The BoC is widely expected to keep its policy rate unchanged at 0.25% on Wednesday. However, the improving economic outlook and recent remarks from officials suggest that the BoC could become the first major central bank to lay out a roadmap out of the ultra-loose policy.”

“Currently, the BoC is purchasing $4 billion worth of government of Canada (GoC) bonds and experts see the bank reducing this amount to $3 billion following the April meeting. This decision wouldn’t come as a surprise and the CAD’s reaction is likely to be short-lived. However, investors will keep a close eye on the BoC’s future plans with regards to additional reductions. In case the bank hints that it will continue tapering before the end of the year, the loonie could continue to outperform its rivals.”

“The BoC could refrain from taking immediate action while providing guidance on QE exit. A dovish tone combined with a cautious outlook could trigger a significant reaction in the CAD.”

“If USD/CAD manages to make a daily close above 1.2570/90 area, where the descending trend line, the 20-day SMA and the 50-day SMA form strong resistance, on the back of a dovish BoC surprise, it could target 1.2675 (100-day SMA) and 1.2740 (March 1 high).”

“Strong support is located at 1.2500. A clear BoC tightening path and a reduction in current GoC purchases could open the door for additional losses toward 1.2400 (psychological level) and 1.2365 (2-year low set on March 15).”