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  • USD/CAD hits a supply zone at a key confluence of the 61.8% Fib of prior major swing highs.
  • BoC chatter seemed to have something to do with the sudden bid in the CAD, but DXY is faltering as well

The Loonie has pared its decline in late rade on Thursday and touched 1.3204 vs the greenback following a speech by the Bank of Canada’s Beaudry. USD/CAD is currently trading at 1.3196 having travelled between a high of 1.3226 and a low of 1.3195. The bulls have been ebbing and flowing their way tot he upside since the dovish tilt at the Bank of Canada.

In recent trade, the bulls have likely journey about as far as the can before the Loonie starts to look cheap having already completed a significant chunk of the Fibonacci retracement of the Sep downtrend to a golden ratio of 61.8%. The chat from the BoC today came from the deputy governor Paul Beaudry as follows:

Key notes

  • Beaudry says financial vulnerabilities can make it harder for bank to meet inflation target.
  • Financial vulnerabilities can cause rate changes to have different effect in short term than in long term.
  • Does not touch upon possible economic impact of coronavirus in speech.
  • Three main financial vulnerabilities are tied to balance sheets, asset prices and risk allocation.
  • Financial vulnerabilities evolve more slowly than traditional monetary factors, and impacts are harder to predict.
  • If we bring financial vulnerabilities into equation, it means introducing degree of flexibility into inflation-targeting process.
  • It is not yet entirely clear how important these channels are, but there is sufficient evidence to warrant our attention; relevance of financial vulnerabilities for monetary policy remains a debated issue.
  • Last October, bank could have considered rate cut to ensure economy didn’t perform below potential.
  • But given state of financial vulnerabilities last Oct, we judged risk of reigniting acceleration in house price expectations and debt buildup was too high.
  • Even if a rate cut looks desirable in short-term, once bank has factored in growth at risk, the cut may no longer look attractive.
  • This is not a departure from our inflation-targeting objective but rather another tool to judge risks to inflation outlook.
  • Even if the macroprudential policy is best suited to ensure resilience of financial system, that doesn’t mean it is capable of eliminating all risks associated with financial vulnerability
  • Financial vulnerabilities can make it harder to hit inflation target.

The Bank of Canada held interest rates unchanged last week, as widely expected, but clearly signalled that a cut could be coming if domestic economic growth numbers continue to disappoint. This sent the CAD down heavily but on a technical basis, and considering the US dollar looks to be running out of steam, that could be just about it on the bid for funds at this stage. We will have to wait and see how much appetite there is left in the bulls following the Gross domestic Produce data in the US session on Friday. 

The pair has fallen on the comments, correcting the highs of the day. There will now be a focus on the Gross Domestic Produce data on Friday. Previewing the data, “TD looks for a flat print on industry-level GDP for November, in line with the market consensus, for the third consecutive month of <0.1% growth,” said TD Securities analysts. “With softer manufacturing shipments and energy production, we look for a muted increase in services to provide the main engine of growth. “

USD/CAD levels