USD/CAD - Canadian Dollar Snaps Rally

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The Canadian dollar snapped a two-week rally yesterday when USD/CAD rallied above downtrend line resistance at $1.3150. Renewed U.S. dollar demand against the major G-10 currency pairs and drop in intraday West Texas Intermediate oil prices combined to sink the loonie.

The Canadian dollar has tracked oil price moves nearly tick for tick over the past few weeks. A lot of that price movement has to do with a lack of domestic currency drivers and because of the Bank of Canada’s stated focus on the impact of low oil prices on the Canadian growth outlook.

The U.S. Federal Open Market Committee decision to put the brakes to near-term interest rate increases served to raise questions about the health of the U.S. economy. There is a school of thought that believes the Fed is concerned that additional rate hikes at this time would accelerate an economic slowdown which could become a recession.

Those concerns fueled fears of slowing global growth which encouraged traders to trim positions in the so-called "risk currencies". The Canadian dollar is often considered a risk currency because of Canada’s commodity exports. Raw materials are in demand during growth periods but not as much during slowdowns.

U.S. President Trump delivered the annual State of the Union (SOTU) address last night. Before his speech, traders were hoping to hear about increased infrastructure spending. It didn’t happen. The speech was the usual banal tripe, consistent with most SOTUs, making it a non-event.

The Canadian dollar was sold, in part, due to a wave of Australian dollar selling. Reserve Bank of Australia Governor Philip Lowe followed in the flip-flop steps of Bank of Canada Governor Stephen Poloz and U.S. Federal Chair Jerome Powell. He did an "about-face" just after issuing a monetary policy statement. Tuesday’s RBA interest rate statement was thought to be "hawkish" because the bias was for higher rates.

Today, the RBA Governor put a rate cut on the table. He said: "Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced." AUD/USD plunged, and the Canadian dollar sank alongside it.

The Canadian dollar is also under duress because of US dollar demand from the U.K. and euro-zone. EUR/USD has drifted lower for the past few days, undermined by concerns for a prolonged dovish European Central Bank (ECB) monetary policy stance. That sentiment has been reinforced by weaker than expected German economic data. Today’s soft Factory orders report (Actual -1.6% vs forecast 0.3%) was another in a string of soft reports.

Canada building permits and the Ivey Purchasing Managers' Index report are due today. U.S. data includes Trade Balance and non-farm productivity.