NZDCAD: BoC Actions Remain Unclear – Scotia Bank (25th March)

Technical Analysis

• Current BoC Policy Rate: 2.75% (after a recent 25 bps cut)
• Inflation Data:
  • CPI spiked higher than expected.
  • Core inflation (excluding volatile components and taxes) continues to rise.
• Market Expectations:
  • Further rate cuts now seem unlikely, given persistent inflation.
  • Investors will closely watch inflation prints and BoC’s next policy meeting.

Fundamental Factors Affecting the BoC’s Decision

1. Inflation is Accelerating, Not Slowing
   • CPI’s latest reading exceeded the BoC’s tolerance levels.
   • The increase was broad-based, not just from housing or temporary factors like sales tax holidays.
   • Core inflation remains elevated, showing no clear sign of disinflation.
2. BoC’s Policy at Odds with Economic Reality
   • The central bank cut rates despite anticipating rising inflation.
   • Scotiabank argues this is excessive easing at the wrong time.
   • The BoC has now limited its ability to respond to future economic shocks (e.g., tariffs, trade war escalation).
3. Concerns Over the BoC’s Policy Direction
   • Analysts question why the BoC is rushing to stimulate demand when inflation is still climbing.
   • Despite clear inflationary signals, the BoC may have weakened its credibility by moving ahead with cuts.

Key Takeaway for Traders

• Short-term: Market uncertainty over the BoC’s next move could lead to volatility in CAD pairs.
• Medium-term: If inflation remains high, the BoC may have to pause further rate cuts or even consider reversing policy.
• Long-term: The BoC’s credibility is at risk—if inflation spirals, aggressive hikes may return, which could shock markets.

NZDCAD – D1 Timeframe

A double break of structure pattern just before a retracement is often a critical indication of prevalent market sentiment in the direction of the breaks. On the daily timeframe chart of NZDCAD, we see the double break of structure, and I have highlighted the drop-base-rally demand zone that serves as the origin of the bullish momentum. Interestingly, the demand zone overlaps the trendline support, thus increasing the bias in favor of the bulls.

NZDCAD – H4 Timeframe

The 4-hour timeframe chart of NZDCAD lends clarity to the higher timeframe demand zone and how it falls within the critical region of the Fibonacci retracement tool. Traders can watch for a reaction from the said region to confirm the bullish entry.

Analyst’s Expectations: 

Direction: Bullish

Target- 1.83420

Invalidation- 0.80558

CONCLUSION

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