Chart Of The Day: Euro Vs. Canadian Dollar Reflects Monetary Policy Divergence
2022.04.14 14:55
On Wednesday, the Bank of Canada announced a 50 basis point rate hike. That would make it the first central bank to have raised rates by more than 25 basis points in 22 years.
It’s also the first G7 central bank to hike interest rates by 0.5%. This is the BoC’s second hike in 2022, after a more tempered 25 basis point increase last month. The two increases bring Canada’s interest rate to a full percentage point.
The central bank’s momentum is accelerating as Canadian fiscal policymakers battle inflation that has appreciated to a three-decade high, because of a variety of factors including the war in Ukraine. The bank also promised that its most significant rate hike since 2000 was just the beginning—that more hikes would follow. After the BoC’s announcement, the Canadian dollar, which had recently been struggling, moved higher.
Contrast the BoC’s actions with the European Central Bank’s path to higher interest rates.
The eurozone is facing record inflation, which came in at 7.5% in March after Russia invaded Ukraine, exacerbating the already existing supply crisis in the region. With peace talks currently at what Russian President Vladimir Putin called a “dead end,” a fresh assault on Ukrainian terrain will be upcoming. Should this occur, commodity and food prices will likely continue spiking, sending EU inflation to new records.
The conflict has additional implications for eurozone countries because of their dependence on Russian energy, which has now been disrupted. That will also impact economic growth.
So where does the ECB stand regarding hiking interest rates? Well, according to President Christine Lagarde, it’s not being ruled out—though the central bank appears not to be rushing into anything either.
As Lagarde said after the ECB’s March meeting, an interest rate hike would come in “some time.” It could be “weeks” or “months later,” which would allow the European central bank to keep its promise not to raise rates until it had ended its asset purchase program, which currently has no end date since the bank just initiated it this month.
Some see this slow walking of rate hikes as a way for the ECB to keep its promises and retain its integrity, while others argue the ECB’s motives are exaggerated and possibly short-sighted. One thing all can agree on, the current inflation is the result of pandemic lockdown-induced supply chain disruptions, with no end in sight.
The differing monetary policy approaches currently on display—with the BoC acting as a trailblazer on the rate hiking front while the ECB continues to signal it’s in no rush—and the FX market’s reception of the diametric policy stances is clearly reflected by movement in the EUR/CAD pair.
EUR/CAD Daily
After falling to its lowest level since May 2015, the EUR/CAD may be developing a rising flag, bearish upon a downside breakout, following the preceding sharp move when the pair dropped 2.84% within four trading days.
The broader view adds validity to the possibility of a downside breakout for the pair.
EUR/CAD Weekly
The pair established a downtrend back in November after falling below the February 2020 low.
The moving averages entered a bearish pattern, with each one falling below the longer one, demonstrating how prices are weakening over time. The last time the three major MAs were in this pattern was back in December 2009, when the pair plummeted 17% in the following six months.
Though that doesn’t mean the same thing will happen this time, these price movements are momentous, potentially providing once-in-a-decade opportunities.
Trading Strategies
should wait for the flag to complete, with a decisive downside breakout, whose penetration would close below the Apr. 5 low, then retest the pattern to prove its integrity before considering a short position.
would wait for penetration of the Apr. 5 low, even on an intraday basis, then wait for a corrective rally to reduce exposure.
could, according to their trading style, short upon a close below the flag. Here is a basic example of a plan:
Trade Sample:
- Entry: 1.3700
- Stop-Loss: 1.3725
- Risk: 25 pips
- Target: 1.3600
- Reward: 100 pips
- Risk-Reward Ratio: 1:4
