The USD CAD erased about half of yesterday’s gains following the release of the results of the latest Bank of Canada meeting. The BoC as expected left its benchmark interest rate unchanged. At its last meeting it announced its intention to keep interest rates at .25% until the second quarter of 2010. With no where to go but up traders were confident that the BoC would leave the rates alone.

The friendly tone of the BoC following the meeting set the bullish direction of the Canadian Dollar throughout the day. In its post-meeting commentary, the BoC said that financial conditions “improved significantly.”

One concern for traders going into the meeting was the feeling of the central bank’s members toward the rapid rise in the Canadian Dollar. Some traders chose to lighten up their positions before the meeting on concerns that the BoC would use strong language to try to talk the currency down. Traders are beginning to worry that the stronger Canadian Dollar would hurt exports. The language used by the BoC to discuss this condition was soft. Therefore, it can be interpreted as a sign that the BoC is not too worried about the price of the Canadian Dollar.

The Bank of Canada also noted that the financial condition of the economy improved because of higher commodity prices. Consumer and business confidence was also judged as showing modest improvement. Higher industrial metals and crude oil no doubt helped improve the economic picture. This is significant because these two markets represent real numbers as opposed to investor or consumer sentiment. As long as real numbers are improving, the Canadian economy will continue to show signs of strength. As I said yesterday, a rally built on sentiment is usually doomed to fail but a rally based on facts is usually sustainable.

Another friendly factor addressed today was the need for quantitative easing. Like it did at the last meeting, the BoC decided to refrain from using this strategy

Despite what the fundamentals did to the market today, traders still have to deal with a potentially negative picture developing on the charts. Tomorrow will be an important day because the USD CAD closed in a position to close higher for the week. This will be an important close because a reversal bottom often leads to the start of a 2 to 3 week counter-trend rally.

Last week’s close in the USD CAD was 1.0899. A close over this price will form a daily closing price reversal bottom. Earlier this week, the market made a bottom at 1.0691 and subsequently rallied to a high at 1.6662. Thursday’s action put the market in a position to test a retracement of the first leg up. This potential support zone comes in at 1.6377 to 1.6309. If this area attracts buyers and the market closes over last week’s close then look for the start of a 2 to 3 week counter-trend rally.

Tomorrow’s U.S. Non-Farm Payrolls Report will most likely be the trigger that ignites a big move in this market. A bearish report will indicate a weaker U.S. economy. This would trigger flight-to-safety rally in the Dollar and drive the Canadian Dollar lower.

Wednesday’s action caused some safe haven trading toward the Dollar. Any unexpected bearish news from the Unemployment report will be bullish for the Dollar and make investors think that the global economy will have a long, rocky road ahead of it.

The technical set up is there for the start of a change in trend to the upside in the USD CAD. All this market has to do is hold the low for the week at 1.0691. If the report comes out weaker than expected and the buyers show up where they are supposed to, then look for the start of a huge short-covering rally.

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