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Dovish Bank of Canada Pushes Loonie to 3-Year Low

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Dovish Bank of Canada Pushes Loonie to 3-Year Low

The USDCAD rallied to a 3-year high on Thursday on the heels of a dovish statement that followed the central bank’s decision to keep interest rates unchanged in Canada. The central bank left key lending rates unchanged but discussed their concerns about deflation and stagnant employment, which reduced yields and pushed the Canadian dollar above resistance levels.

The bank announces its latest policy decision on interest rates every six weeks, and the bank has now stood pat for 26 consecutive policy meetings. In a statement accompanying Wednesday’s decision, the bank said it expects inflation to remain lower than previously anticipated and extended period. It also said it expects a soft landing in the housing market. With core inflation well below target, markets are increasingly pricing in a rate cut by the Bank of Canada.

Yields in the Canadian market tumbled to new lows for the year. The 10-year slipped below 2.47% for the first time in the past 12-months while forward curve moves against the Loonie. The interest rate differential between Canada and the US in the 10-year sector know strongly favors the US which should help drive the USDCAD higher.

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The USDCAD broke out to a new 36-month high on strong momentum. The MACD (moving average convergence divergence) moved to its highest level in the past 12-months reflecting robust momentum. The trajectory is also pointing higher which foreshadows higher prices. The only technical caveat is the level of the RSI (relative strength index). The RSI moved higher with price action reflecting accelerating momentum but is printing near 81, which is well above the overbought trigger level of 70, and could foreshadow a short term correction.

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