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USD / CAD - Canadian Dollar is Making a Move

- Risk sentiment improves boosting global stock markets

- US closed Monday, bond market closes early today

- US dollar adds to yesterday’s losses, albeit modestly

USDCAD Snapshot: open 1.2733-37, overnight range 1.2734-1.2782, close 1.2771, WTI open $114.35, Gold open $1,858.81

The Canadian dollar is making a move. USDCAD broke below a month-long uptrend line when prices fell below 1.2790 yesterday and is now deep into the “Support Zone.” The area between 1.2640 and 1.2740 has contained USDCAD downside moves since April 13. A decisive breach of the 1.2640 zone suggests further losses to 1.2440.

The Canadian dollar is buoyed by broad US dollar selling pressures due to a global stock market rally that turned risk sentiment positive. It doesn’t seem likely to last.

Geopolitical tensions are escalating, not dissipating.

Russian Foreign Minister Sergey Lavrov warned the western nations that supplying Ukraine with weapons that can strike inside Russia is unacceptable and risks serious consequences. Then US Secretary of State Antony Blinken accused China of being “the most serious challenge to long term order.” Furthermore, the EU finds it very difficult to secure alternatives to Russian energy supplies, which increases recession risks in the region.

Canadian dollar traders are looking ahead to next Wednesday’s Bank of Canada monetary policy meeting. The BoC is universally expected to raise the overnight rate by 50 basis points to 1.50% from 1.00%. Earlier, BoC Governor Tiff Macklem warned that Canadian interest rates would rise above the “neutral rate” between 2 and 3 % to tame inflation.

If USDCAD is sold following the BoC rate hike, the losses will not likely be sustained as the Fed will match the increase two weeks later.
The current US Fed funds rate is 0.75-1.00%and will rise to 1.00-1.500% June 15.

Traders are focused on today’s US PCE Price index data, which is said to be the Fed’s preferred measure of inflation. April PCE is expected to tick down to 0.8% m/m from 0.9% in March, while the year-over-year result is unchanged at 6.7%.

EURUSD traded in a 1.0708-1.0764 range, rallying in Asia and retreating in Europe. The gains were due to an improved risk tone while profit-taking knocked prices down.

GBPUSD rallied yesterday following Chancellor Rishi Sunak’s “mini budget,” which doled out another £15 billion “cost-of-living” aid package, while slapping a 25% windfall tax on energy company profits.

AUDUSD rallied from 0.7091 to 0.7148 due to general US dollar weakness and improved risk sentiment when Chinese stocks rebounded.

Monday is the Memorial Day holiday in the US, which means an early close for fixed income markets. It also means that FX, equity, and commodity markets will be rather quiet as those traders who can, get an early start to the long weekend.