Canadian Dollar Firms Up as Better US Economic Outlook Offsets Dovish BoC

The Bank of Canada has made it clear that it is more worried about the country's economic growth than inflation, but the central bank's comments failed to trigger a selloff in the Canadian dollar, with its counterpart in the US sounding more confident about the strength of recovery there.

A stronger US economy is always advantageous for Canada, which earns a major portion of its export income from the US, and therefore should strengthen the loonie. At the same time, a broad greenback rally can weigh down the Canadian unit.

On 16 July, both happened together, providing mixed signals to the Canadian dollar.

The US currency had rallied across the board driven by Fed Chair Yellen's hawkish remarks in her Senate testimony while the BoC policy and the dovish press comments by its chief Poloz afterwards weighed on the loonie.

The USD/CAD that jumped 50 pips on Yellen's remarks on 15 July to 1.0770 experienced a momentary spurt to as high as 1.0796 during the BoC event on Wednesday but soon gave back the gains.

The pair was back near 1.0720 by 17 July, where it had been before the Fed testimony, and will wait for more fundamental cues, expected in the coming weeks.

At Wednesday's USD/CAD low, the Canadian dollar was 0.17% stronger than Tuesday's close.

The second half of July is quite important for the US as well as Canada with consumer price inflation and GDP growth data due from both sides while the FOMC is scheduled to review interest rates during the period.

In addition to that, Canadian retail sales and a host of confidence and PMI indices from the US are due in the next two weeks. Employment data will also be a keenly watched US release this month.

Technically, the USD/CAD is testing the support at 1.0720, and has its next target near the 1.0710-1.0690 area. A break of that will confirm the reversal of the uptrend since 11 July, triggered by the negative surprise from the Canadian labour market.

Further south, the pair is likely to get weak supports like 1.0680 and 1.0645 ahead of the stronger 1.0630-1.0620 region.

On the higher side, the USD/CAD has its first level to watch at 1.0750 and then 1.0775 ahead of the stronger resistance line of 1.0800.

A break of that will reverse the entire weakness in the pair triggered by a hawkish FOMC, leaving Poloz wondering what needs to be done for his currency to be supportive of the kind of recovery he wants to see in Canada.