- USD / CAD has continued to decline since falling below 1.3000, despite somewhat reduced volumes and uneventful markets.
- The impetus for the move has been a broad softening of the US Dollar, with DXY dipping below 92.00.
The USD / CAD is just above the day’s lows below 1.2980, the pair has been gradually declining throughout the last trading session of the week amid a widespread weakening of the USD that has seen the dollar index (DXY) fall below 92.00 and towards lows of the year around 91.74. As things stand at the moment, USD / CAD is trading at a loss for the day of just under 30 pips or around 0.2%.
CAD adjusts to bearish USD flows amid dovish crude and lack of specific Canadian drivers
Amid a clear lack of news flow or data specific to Canada on Friday, as well as broadly subdued trading within crude oil markets, USD / CAD has been trading broadly based on USD flows, or USD weakness to be more precise.
For many analysts and institutions, the continued decline in the USD is not a surprise, given that many of the prevailing market narratives work directly against the USD.
One of the key narratives that has fueled equity markets, commodity markets, and risk-sensitive currency markets since early November has been the improving outlook for 2021 and beyond amid 1) good news about vaccines (illuminating financial markets at the end of the tunnel on the pandemic) and 2) Joe Biden’s victory in the US presidential election, which marked a turning point for international relations towards more favorable global trade conditions.
However, many are now also citing short-term risk factors weighing on the USD. Credit Agricole attributes the persistent decline in the USD to investors who are concerned “about the health of the US economy, which is still in the grip of a third wave of Covid-19,” and notes that “the Minutes of October the Fed have already hinted that the FOMC could adjust the pace of its QE program if the economic outlook deteriorates further and given that the prospects for another fiscal stimulus package before the end of the year appear bleak. “
Looking ahead to next week, Credit Agricole believes that the release of level one data in the United States for November (PMI manufacturing and ISM services, nonfarm payrolls) “could determine whether the Fed will have to act again at its meeting of December policy or not. ” The implications are that the wrong data should be detrimental to the USD (rather than what sometimes happens when the USD recovers after the wrong US data on a safe haven offer), given that the wrong data they imply a more dovish Fed. However, the bank suspects that “there are already a lot of negatives in the USD price, so it would take major disappointments in the US data to make the currency drop drastically.”
Looking ahead, things could perk up for crude oil markets next week with the conclusion of the two-day OPEC + meeting on Monday, which means that the loonie could also see some volatility overall.
USD / CAD continues to move lower within the downtrend channel
USD / CAD has continued to move south within the confines of a downtrend channel linking the November 15, 23 and 25 highs to the upside and the November 16, 19 and 25 lows to the downside.
Thus, the implication is that the path of least resistance for USD / CAD remains to the downside, where an eventual dip towards 1.2950 and ultimately year lows around 1.2930 is the most likely course of action.
However, if the bulls pick up some strength and push the pair out of the top of its trend channel (which would come into play as resistance around 1.3040), then resistance at 1.3090, then the psychological level of 1.3100 and then around 1.3110-1.3120. be the areas to watch.
4 hour chart