The Canadian dollar benefits from a divergence of views between the Bank of Canada (BoC) and the Fed on monetary policy.
The BoC is more hawkish than its counterparts at the Fed.
The Bank of Canada's decision was based on pooled data. It indicates that excess demand in the economy has persisted longer than expected. That increases the risk that inflation could rise above the 2% target.
In particular, strong demand for both goods and services, a tight labor market, and weak signs of recovery in the housing market. All this shows ongoing inflationary pressure in the Canadian economy.
Although the Fed considers further policy tightening over the long term, the Bank of Canada acts more dynamically at this stage.
A quote from yesterday's Fed statement that suggests a more restrained mood about the pace and conditions of further policy tightening:
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5 to 5-1/4 percent. Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. “
In addition, relatively high crude oil prices have complemented the strength of the Canadian dollar against the U.S. dollar, and the Canadian currency may continue to rise.
USD/CAD is trading in a key area of convergence, around long-term trendline support and the psychological level of 1.3300.
While the trendline support was broken yesterday, the bears failed to close below 1.3300, and this could be the catalyst fueling the downward movement.
Take profit at 1.3000
Stop-loss at 1.3600