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CAD surges after hawkish Bank of Canada decision

The CAD soared after the recent BoC action, but it needs to push the USD/CAD pair below 1.23 to continue strengthening.

The USD/CAD pair was down 0.5% Wednesday, trading at around 1.2340 as traders were surprised by a relatively hawkish Bank of Canada monetary policy decision.

Bank of Canada surprises

Earlier in the day, the Canadian central bank led by Governor Tiff Macklem announced it would end its quantitative easing program that has poured hundreds of billions into the financial system since the start of the Covid-19 pandemic.

Thus, the bank is ending quantitative easing (QE) and moving into the reinvestment phase , during which it will purchase Government of Canada bonds solely to replace maturing bonds. Additionally, the central bank pledged not to raise the benchmark overnight policy rate until the recovery is complete. Still, central bank governors now think that will happen in the β€œmiddle quarters’’ of 2022 , bringing it forward from the second half of next year as previously thought.

US data under scrutiny

Traders also paid attention to US durable goods orders for September, released today. They slowed notably to -0.4% from 1.3% previously, although the number was better than -1.1% expected. Core durable goods orders ticked higher a notch to 0.4% from 0.3% in August.

Orders placed with US factories for business equipment rose in September for a seventh straight month , pointing to ongoing strength in capital investment. However, the US dollar remained broadly lower after the data.

The USD/CAD pair trades close to its four-month lows as rising oil prices have supported the Canadian dollar. The WTI benchmark has recently traded as high as 85 USD, printing fresh seven-year highs. As long as oil remains in such a steep uptrend, the CAD should strengthen further.

The pair is now testing significant support in the 1.2550 – 1.23 zone . Some larger stop-losses could be triggered if bears push the USD below it, likely sending the greenback further lower. The medium-term target remains at summer lows at the psychological 1.20 zone.

Alternatively, the greenback needs to rise above 1.25 to cancel the immediate bearish trend, which right now looks unlikely. The USD has failed to benefit from the recent surge in US yields, reinforcing the current bearish narrative in the USD/CAD pair.

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