Bank of Canada Ends Quantitative Easing Program

Fundamental analysis of Forex market

The Bank of Canada surprised markets today by reducing its bond purchase program from $C2 billion per week to C$0, ending its Quantitative Easing Program.  Expectations were that the BOC would cut bond purchases in half, by lowering them to $C1 billion per week. Bond purchases now will only be made to match maturities.  In addition, the Bank of Canada moved forward its guidance on interest rate increases from the second half of 2022 to “the middle quarters” of 2022.  Before the meeting, markets had been pricing in Canada’s first rate hike in April 2022.  After the meeting, a rate hike for January 2022 was 64% priced in and 100% priced in for March 2022.

The BOC also lowered is guidance for GDP for this year to 5% from 6%, before falling to 4.25% in 2022 (previously 4.6%) and 3.75% in 2023 (previously 3.3%). The central bank also said they expect inflation to remain at elevated levels longer than they had expected, moderating to 2% by late 2022.

On a 15-minute timeframe, the pair dropped immediately following the surprise from roughly 1.2408 down to 1.2301, an indication most market participants were not expecting the announcement:

Source: Tradingview, Stone X

However, despite the large drop in USD/CAD, the pair failed to take out the previous lows of 1.2288 from October 12th. What price action did do though, was set up a flag pattern on the daily timeframe, which target’s near support at the May 2015 lows of 1.1918. If prices close today below 1.2350, it will have created a bearish engulfing candle, a sign that the previous move lower will continue.  If USD/CAD is to reach the target, it must first pass through horizontal support at 1.2254 and 1.2204. Resistance is at a convergence at the top of the flag trendline, today’s highs, and horizontal resistance at 1.2415.  Further resistance is at the 200 Day Moving Average near 1.2490.

Source: Tradingview, Stone X

 As discussed in the Currency Pair of the Week, EUR/CAD had the potential for volatility this week with both the BOC and the ECB (tomorrow) meeting.  Indeed, just as USD/CAD sold off, so did EUR/CAD. If price closes below 1.4337, the daily candlestick will be a bearish engulfing candle on the daily timeframe.  In addition, if price closes the week below 1.4319, it will have created a bearish engulfing candle on the weekly timeframe! Support below is at the February 2020 lows of 1.4264.  Below there, price can fall the way down to 2017 lows at 1.3784!  Resistance isn’t until back at today’s highs near 1.4443.  Keep in mind that the ECB meets tomorrow!

Source: Tradingview, Stone X

With the Bank of Canada ending their Quantitative Easing Program and moving their rate guidance forward to the middle quarters of 2022, USD/CAD and EUR/CAD have dropped precipitously.  However, with US FOMC next week and the ECB meeting tomorrow, along with any volatility in oil prices (due to the high correlation of the Canadian Dollar and oil prices), and USD/CAD and EUR/CAD could be in for quite a ride over the next few weeks!