Loonie Bulls: Don't Thank the Bank of Canada for the Currency's Strength
The Canadian dollar started to rally before the BOC lifted rates – and there was a way to predict that
by Nico Isaac
Updated: September 27, 2017
True or False: The Bank of Canada is to the Canadian dollar what Gepetto is to his puppet Pinocchio. Meaning: Monetary policy on the part of the BOC directly affects the strength or weakness of the country's currency.
Well, per mainstream wisdom, the answer is a resounding "true." Take, for instance, the recent news surrounding the Canadian dollar's powerful surge to a 2-year high against its U.S. counterpart on September 9.
Said popular opinion: The main catalyst for the loonie's liftoff was a "surprise" rate hike by the BOC on September 6, the institution's second rate hike in as many months. Wrote one news source:
"Breathtaking move in the Canadian dollar after the Bank of Canada hike." (Sept. 9 Forex Live)
It's no surprise, then, that those same pundits see the BOC holding the strings to the loonie's future. Here, a September 25 Investing.com article sets the tone:
"Whether the USD/CAD sees a decline depends largely on Wednesday's [Sept. 27] speech by Bank of Canada Governor Poloz. The B.O.C. has been extremely hawkish and if this view is reinforced by Poloz, the loonie will reverse course quickly. However, if there's even a hint of caution in his vice, USD/CAD will extend its gains."
But the reality isn't that simple.
Yes, there have been back-to-back rate hikes by the Bank of Canada in 2017.
And yes, the Canadian dollar soared 10%-plus to a two-year high against the U.S. dollar during those hikes. But NOT, and this is part is critical, because of those hikes.
As the following chart of BOC interest rate history shows, the USD/CAD started falling (i.e., the loonie started rising) on May 5 -- two months before the Bank of Canada raised its benchmark overnight rate on July 12, its first hike in 7 years.
So, either the Canadian dollar is psychic ... or, the currency started to rally for some other reason than the BOC's not-yet-realized rate hike.
We believe that reason is investor psychology, which unfolds as Elliott wave patterns directly on the market's price chart. In fact, we can go back to the beginning of the USD/CAD's turn down, at the May 5 peak, and see how Elliott wave analysis identified a high-confidence set-up for loonie bulls.
First, on May 3, our Currency Pro Service analyst Tony Carrion set the stage for an "important market top":
"This market deserves your extra attention over the coming day and more, starting now. At longer term bigger wave degree, the entire projected five wave rally sequence from the January low is now waning ... and the next anticipated big move is for that overall rise to be more than fully retraced starting soon ... which constitutes delicious opportunity.
"A more than reasonable small wave degree case can be made that price needs to rise in five waves from 1.3680 to above 1.3758 and into the low to mid 1.38s in carving out our desired longer term bigger wave degree important market top."
On May 5, USDCAD rose close to the cited upside target (1.3793 vs. 1.3839) and reversed course. Then, on May 7, our Currency Pro Service confirmed the trend had now turned down:
"The decline is impulsive. It raises the possibility the recovery has finally ended and the bear trend is resuming."
The next charts shows what followed: The USD/CAD claimed the downside, plunging 10%-plus to the two-plus-year low of September 9 before catching its breath.
Today (September 27), countless USD/CAD traders will be glued to the words of Bank of Canada Governor Stephen Poloz and whether he continues to commit to a hawkish, rate hike agenda.
But if there's one thing today's lesson should tell you, it's that the real place USD/CAD traders should be focused on is the price Elliott wave pattern unfolding directly on the currency pair's price chart.
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