A Canadian dollar rally in Europe ended as abruptly as it started. USD/CAD was adrift in a $1.4030-55 range in Asia and until mid-morning in Europe. It dropped to $1.4020 coinciding with a jump in EUR/USD when German Producer Price data for April a tick was better than it was in March. That move was reversed following weak German and Eurozone Gross Domestic Product reports for Q1. USD/CAD started climbing and continued to do so in early Toronto trading, taking prices to $1.4102 so far.
USD/CAD has been a tad whippy. Yesterday’s rally to $1.4133 may have had a lot to due with the 10:00 a.m. option expiry, as prices quickly reversed immediately afterwards. The annual Bank of Canada Financial System Review didn’t say anything to change the immediate trajectory of USD/CAD. In fact the only real driver of the currency pair is U.S. dollar sentiment, although rising oil prices are acting as a drag on USD/CAD gains.
USD/CAD probes of downtrend resistance line levels in the $1.4130-40 have failed (so far). A break below $1.4060 suggests another downside push which could extend to $1.3850.
Bullish USD/CAD reasons
U.S. dollar demand from rising risk aversion sentiment sparked by equity market weakness. There are an increasingly number of bearish equity market outlooks with a common theme that "upside gains are limited."
There's also the question of U.S. dollar demand as Trump rekindles his anti-China rhetoric. He is irked about China’s handling of the pandemic and this morning said "There are many things we could do. We could cut off the whole relationship." Adding fuel to the fire, National Security Advisor Robert O’Brien and Economic Advisor Larry Kudlow wrote a letter to Labor Secretary Eugene Scalia, saying the White House does not want the Thrift Savings Plan to invest in Chinese assets.
U.S. dollar demand from another round of COVID-19 cases.
Bearish USDCAD reasons
Free-falling WTI crude oil prices may have found a floor $24.00/b, and while above that level offer USD/CAD topside a little resistance.
Bank of Canada notes that "We entered this global health crisis with a strong economy and resilient financial system. This will support the recovery. But we know that debt levels are going to rise, so the right combination of economic policies will be important too."
FX markets are anticipatory and that suggests that barring another outbreak, the worst of the COVID-19 pandemic is behind us.
As the economy starts to normalize, upcoming economic data may be better than expected.
Today’s U.S. economic reports which include Retail Sales, are expected to be weak, which suggests they won’t have much impact on FX markets.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
