The market liked what the Bank of Canada had to say Monday, widely viewed as a shift in position or tone. This spilled over into the Canadian dollar trade, which broke above the range traded over the past 14 days while reaching a seven-week high.
Speaking from Winnipeg, Senior Deputy Governor Carolyn A. Wilkins described first quarter growth in Canada as "pretty impressive" at 3.7%, while noting broad-based improvements across a number of business sectors. This also contributed to Canada's positive jobs report released last week.
"As growth continues and, ideally, broadens further, Governing Council will be assessing whether all the considerable monetary policy stimulus presently in place is still required," stated Wilkins, with Globe and Mail headlines pointing to the first possible rate hike in seven years looming.
The Canadian dollar was primed for a sharp move higher, as seen in Monday's trade. As seen on the attached graphic, noncommercial traders held a record net-short futures position in Canadian dollar futures as seen in CFTC data for the week of May 23 of 99,109 contracts. During the past two weeks, this position has been pared, although only slightly, with the most recent CFTC data showing the noncommercial net-short position of 94,501 contracts, holding very close to the record short reached in previous weeks. The result is a potential rush to short-cover should the news turn against investors, which is exactly what is seen in Monday's report with the shifting tone coming from the Bank of Canada.
The Canadian dollar has traded range-bound over the past three weeks, from a low of $.73928 CAD/USD to a high of $.74568 CAD/USD. Monday's move saw this range breached, as well as resistance at the 61.8% and 67% retracement of the move from the April high to May low. In addition, the move broke above the 100-day moving average. Further resistance lies at the 200-day moving average at $.75078 CAD/USD, along with the April high of $.75582 CAD/USD.
Despite the central bank's shift in policy, Monday's presentation did highlight risks, with the uncertainties surrounding the U.S. administration's policies surrounding trade, taxes and other regulatory issues on the radar.
The next Bank of Canada interest rate decision will be released on July 12.
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