Wednesday (April 21) in the sub-session, the dollar index was basically stable, is now trading around 91.20; Spot gold remains firm, gold has broken through $1780 / oz, bulls short-term target is still aimed at $1800 / oz important level. In the trading day, investors will brace for a monetary policy decision from the Bank of Canada, which is expected to scale back its bond purchases, the first of any major central bank to do so. Investors will also be looking at the Bank of Canada’s monetary policy statement and the latest economic forecasts, all of which could trigger sharp swings in the Canadian dollar.
The Bank of Canada’s decision comes in a big way
The Bank of Canada releases its interest-rate decision and monetary policy report at 22:00 Hong Kong time on Wednesday. At 23:00 Hong Kong time on Wednesday, Bank of Canada Governor McCullum will hold a press conference.
Analysts expect the Bank of Canada to keep rates unchanged at 0.25 percent. But the central bank could announce a change in asset purchases and trigger a USDCAD reaction.
The Bank of Canada is expected to become the first central bank in a developed economy to formally launch an exit plan from its quantitative easing program at this week’s meeting, and is expected to announce it will scale back its bond-buying to C $3 billion a week.
MUFG expects the Bank of Canada to cut its weekly bond purchases from C $4bn to C $3bn this week.
“Policy guidance and overall tone will be key,” the bank said. There may be some risk, perhaps to compensate for tapering, that the Bank of Canada will stress its caution, particularly in light of the recent resurgence of COVID-19 in Canada and concerns about possible currency overvaluation. Canada added 616,000 new diagnoses in the past week, still near a record high. This could lead to further short-term underperformance of the Canadian dollar, which has been the worst performing G10 currency this month.”
Financial website FXStreet Outlook for the Bank of Canada Rate Decision said the decision will be tricky, as good economic data clash with extensive containment measures. The Canadian dollar sold off Tuesday as investors anticipated a cautious move by the Bank of Canada.
USDCAD could fall back to 1.25 if the Bank of Canada maintains its positive outlook and stresses the recovery process, FXStreet said. Add risk focus and a cautious tone to the statement and USDCAD could rally above 1.27.
USDCAD was trading around 1.2608 in Asia on Wednesday. USDCAD has been trading in a tight trading range of 1.2470 to 1.2647 for the past month.
According to Michael O’Neill, who writes exclusively for FX168, the central bank of Canada is expected to announce a tapering of QE purchases at its monetary policy meeting on Wednesday. Officials said monetary policy would remain loose even with the tapering.
On Wednesday, the Bank of Canada will announce its rate decision and release its monetary policy report, FXStreet analyst Eren Sengezer noted on Wednesday. The Bank of Canada is widely expected to keep its policy rate unchanged at 0.25 per cent, but it could announce a change in its asset purchases and trigger a USDCAD reaction.
FXStreet analyst Joseph Trevisani said the Bank of Canada will release its latest economic forecast on Wednesday, which is expected to show a lot of improvement.
Analysts said the Bank of Canada was expected to upgrade its economic outlook in light of the U.S. stimulus bill, better expectations for Canadian economic data and rising commodity prices. The consensus view is that Canada’s GDP will reach a 3.6% annualized rate in the second quarter, and the Bank of Canada is likely to share that view.
Credit Agricole believes currency investors will remain cautious ahead of the BoC’s April meeting. Ahead of the meeting, investors expect the MPC to announce the start of tapering. In the bank’s view, the Bank of Canada could indeed announce the pace of its asset purchases this week. In addition, the Bank of Canada may resist expectations of an early rate rise in the near future.
Gold has room to rally beyond $1,780
Spot gold rose Tuesday as U.S. bond yields fell. Spot gold settled at $1778.75 an ounce, up $7.32, or 0.41 percent. On Tuesday, the yield on the benchmark 10-year Treasury note fell 4 basis points to 1.5 per cent.
Gold extended gains in Asian trading on Wednesday, reaching as high as $1,782.55 an ounce.
Adam Koos, president of Libertas Wealth Management Group in New York, said gold’s gradual rally from its March 30 lows has been driven by a weaker dollar, lower yields on Treasury bonds, which have become extremely overbought, and U.S. stocks ripe for a pullback.
According to Economies.com, gold rebounded sharply after testing $1,765.00 an ounce at one point, keeping the bullish trend in place for some time to come. The way is open for gold to move further to its next target of $1800.00 / oz. Gold needs to stay above $1,765.00 / oz to continue the bullish trend.
“Gold’s recent momentum has been driven by good bond buying and the fact that the dollar is under pressure,” said Tai Wong, head of basic and precious metals derivatives trading at BMO.
Mr Wong added: “The new range of $1,760 – $1,810 is likely to remain in place until there is another clear market driver. We’ll probably have to wait for the FOMC to see if there’s a change in tone and how the next auction plays out, but overall demand for Treasuries is strong.” The Federal Open Market Committee will hold its next policy meeting on April 27, BBB 0, 28.
Rona O’Connell, an analyst at Stoneex, said gold could still move higher as “there is too much liquidity in the market and that will remain so for quite some time, although the green signs of recovery in some areas look quite strong”.
Michael McCarthy, chief market strategist at CMC Markets in London, said: “Right now the combination of dollar weakness and lower interest rates is positive for gold. As long as the price stays above $1,765 an ounce, the outlook for gold looks good in the short term.”
FXStreet analyst Eren Sengezer wrote on Wednesday that the sharp drop in U.S. Treasury yields and risk-averse market conditions appear to be helping gold find demand.
Sengezer noted that on the four-hour chart, gold closed above $1,775 an ounce on Tuesday, which is where the Fibonacci 23.6 percent retracement of the latest rally took place. The next target for gold is $1,790 / oz (Monday’s high).
Spot gold hit $1,790.14 an ounce on Monday, its highest level since February 25.
Sengezer added that the relative strength index (RSI), also on the four-hour chart, remained around 60, suggesting gold could move higher before becoming technically overbought. Gold first supported at $1775 / oz (Fibonacci retracement of 23.6% & 20-cycle EMA), further down supported at $1767 / oz (Fibonacci retracement of 38.2%) & $1760 / oz (Fibonacci 50% retracement).