The Bank of Canada cut rates for the second time this year on concerns of economic contraction in the first half of the year and low inflation. The Bank cut the overnight rate by ¼ percentage point to 0.5%. Earlier in January, the BOC cut rates by the same amount.
Price action on the USD/CAD daily chart shows that the bearish ABCD pattern I identified last week was invalidated as a result of today’s rate decision. Price skyrocketed from 1.2788 to 1.2922 immediately. Major resistance should ultimately come from the psychological 1.30 level.
If we see price pullback from current levels, key support will come from the 1.2742 level, which is the141.4% Fibonacci expansion level of the B to C leg. Deeper support will come the 1.26 region.
If oil prices continue to fall and we do not see a major shift in Fed Chair Yellen’s expectation for the US to raise rates this year, USD/CAD could eventually target the 1.3464 level before the end of the year.
The trade: Buy USD/CAD at 1.2875 with a stop loss at 1.2775 and take profit at 1.3175. The risk/reward ratio is 1:3
Edward J. Moya
Senior Market Strategist
WorldWideMarkets Online Trading