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Why USD/CAD dropped and for how long?
Information is not investment advice
CAD will get fresh volatility after BOC statement on June 3 at 17:00 MT time.
The Canadian dollar has enormously outperformed the US dollar. Just look at this swing below!
USD/CAD broke through the 100-day moving average(MA). Now it’s headed towards the 200-day MA at 1.345. If it manages to break through it, it will dip down to 1.33. Resistance levels are 1.38 and 1.4.
What are the reasons?
CAD is commodity-sensitive
The loonie gained on surge of oil prices. The oil market has shown significant recovery. It’s trading at $35. Of course, it’s well below the pre-crisis levels, but the outlook is promising as OPEC+ may expand supply cuts further.
Weak USD
Violent protests in the USA pushed the US dollar down. As a result, investors have doubts about the future US recovery soon. That’s why CAD turned out to be in a win position.
Canadian recovery from coronavirus
Monday data showed that Canada’s Manufacturing PMI rebounded from 33 in April to 40.6 in May. Numbers are still below 50.0, what means the economy hasn’t recovered yet completely, but things are getting better in Canada.
Risk-on market
The markets shrugged off worries about US-China tensions. Instead of it, traders focus on the coronavirus recovery and easing of lockdowns. As a result, the Canadian dollar become favorable as a risk-on currency.
What’s next?
BOC statement on Wednesday
The Bank of Canada’s new chief, Tiff Macklem, will probably leave the rate unchanged at a record low of 0.25% during the meeting on June 3. Some analysts say that Macklem can impose some extra asset purchases to support economic activity with additional liquidity. Others think, he will take a wait-and-see approach and hold its ammunition for a rainy day, when the new money injection really is needed.
The main focus will be on the central bank’s guidance. Investors will look for hints on the future recovery under the new governor.
If the BOC gives optimistic outlook, CAD may go up.
Otherwise, if the BOC’ forecast is uncertain and dark, CAD can go down.
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