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Bank of Canada Warns about Canadian Dollar's "persistent strength"

James Hyerczyk from ForexHound.com at 01/20/10


The USD CAD closed higher on Tuesday after the Bank of Canada left interest rates unchanged but warned about the Canadian Dollar’s “persistent strength” and its possible negative impact on the economy.  Since October the BoC has been issuing statements regarding the rapid rise in the Canadian Dollar and its potential detrimental effect on the recovering Canadian Dollar. Warnings have ranged from mild to stern and some have come from Prime Minister Harper.  In this case, the BoC set a new schedule for its asset-buyback program as it attempts to boost liquidity and support economic growth.

This action of flooding the market with cash should be friendly toward the USD CAD.


Technically, the USD CAD continued to build a support base above the Oct. 15, 2009 bottom at 1.0205. This bottom was made at about the first time the BoC issued a stern warning about the value of the Canadian Dollar. At the mid-session, the market showed some strength by piercing a downtrending Gann angle at 1.0325.  This angle drops to 1.0305 tomorrow. Holding above this price could trigger a further rally to a key retracement zone at 1.0484 to 1.0546.


The EUR USD took a beating on Tuesday. This current round of weakness is being triggered by mounting concerns about Greece’s ability to resolve its debt issues.

Traders are expecting the European finance ministers to hold their ground and maintain that Greece solves its own problems. This could be an indication that this problem will persist as Greece is having problems reaching a budget solution.  In addition, similar problems could crop up with Spain and Portugal.


Additional selling pressure came from the news that German investor confidence declined more than expected. Speculators are pricing in the possibility the Euro Zone economy may be stalling.  This report could serve as proof that the Euro Zone recovery is falling behind the other major economies.


The GBP USD traded higher but closed inside of a key retracement zone at 1.6478 to 1.6355. Early in the trading session, the British Pound soared to the upside on the news that Kraft was about to acquire Cadbury PLC. The news of the acquisition originally drew bids from British Pound traders who helped maintain its early upside bias.  The violation of key technical resistance levels also helped to send the market higher. 


Higher than expected consumer inflation helped drive the British Pound lower after an initial spike following the release of the report. On Tuesday, a report was released which showed that inflation had accelerated at a record pace.  It also served as proof that the Bank of England stimulus plan is working, and that there is no need for further stimulus measures.  The BoE stimulus activity did its job but stopping the threat of inflation, but has helped put inflation back on the agenda. Today’s inflation report may have been an aberration or an unexpected jump in inflation because of the additional stimulus the BoE added several months ago. Now that the fresh money has been circulated, look for inflation to flatten out next month.   


The USD JPY finished near its high on Tuesday. The chart indicates that this market may test a downtrending Gann angle at 91.77.  A 50% retracement price comes in at 92.04.  The bigger picture is still suggesting that 89.30 is the next major downside target.  Today’s strong rally in the U.S. equity markets helped to weaken the Japanese Yen.


The new main range in the USD CHF is 1.0507 to 1.0130.  At the close, this market was trading inside the retracement zone of this range at 1.0318 to 1.0363.  The chart indicates that the next upside target is downtrending Gann angle resistance at 1.0382.  An uptrending Gann angle at 1.0270 is the best support.


The recent downward bias in the AUD USD has helped to form a new range at .8734 to .9329.  Based on this range, look for a possible retracement to .9031 to .8961 over the near-term.  Up trending Gann angle support at .9074 will be the first downside target.  On the upside, .9269 is short-term resistance. 


Today’s strength in the U.S. equity markets led to a late session short-covering rally. This pair could trade in a tight range tomorrow as traders await Thursday’s key economic news from China. These economic reports will decide whether the Aussie breaks out above .9329 or begins a corrective move to .9031.


Stronger equity markets led to a recovery in the New Zealand Dollar.  The new main range in the NZD USD is .6970 to .7442.  The next retracement target is .7206 to .7150.  The chart pattern suggests a break to this zone is likely, but this market has to get through uptrending Gann angle support at .7330 first.  Breaking this angle will be the first sign of developing weakness. Economic news from China will be the catalyst behind the next major move.


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