USD/CAD climbs to a fresh year-high (1.3445) as the Bank of Canada (BoC) adopts a less-hawkish tone ahead of 2019, and recent price action keeps the topside targets on the radar as the Relative Strength Index (RSI) flashes a bullish signal.

USD/CAD RATE FORECAST: POST-BOC RALLY TRIGGERS RSI BREAKOUT

The Canadian dollar may continue to depreciate against its U.S. counterpart as the BoC sees ‘additional room for non-inflationary growth,’ and it seems as though the central bank will stay on the sidelines at the next meeting on January 9 as inflation ‘is expected to ease in coming months by more than the Bank had previously forecast’.

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Keep in mind, the BoC may continue to prepare Canadian households and businesses for higher borrowing costs as Governor Stephen Poloz warns that central bank is ‘looking to move interest rates to a neutral level,’ but the fresh remarks suggest the Governing Council will take a more gradual approach in normalizing monetary policy after delivering three 25bp rate-hikes in 2018.

With that said, the shift in the forward-guidance for monetary policy may continue to produce headwinds for the Canadian dollar especially as the Federal Reserve is widely expected to implement higher U.S. interest rates later this month, and USD/CAD may continue to appreciate ahead of Canada's Employment report as the exchange rate carves a series of higher highs & lows.

At the same time, recent developments in the Relative Strength Index (RSI) highlights a similar dynamic as the oscillator breaks out of the bearish formation carried over from the previous month, with a break above 70 raising the risk for a further advance in USD/CAD as the bullish momentum gathers pace.

USD/CAD DAILY CHART

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• Broader outlook for USD/CAD remains constructive despite the dip below trendline support as the exchange rate clears the June-high (1.3386), with the recent series of higher highs & lows raising the risk for a larger advance especially as the Relative Strength Index (RSI) appears to be breaking out of a triangle/wedge formation.
• Nevertheless, need a break/close above the 1.3420 (78.6% retracement) 1.3460 (61.8% retracement) region to open up the 1.3540 (23.6% retracement) hurdle, with the next area of interest coming in around 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion).

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