Loonie

At FOREX.com, we try to avoid writing about the same currency pair two trading days in a row, but occasionally big new developments make it impossible to avoid.

Last week, we highlighted how USD/CAD saw a momentary bout of weakness (loonie strength) after the Bank of Canada raised interest rates before reversing sharply back to the topside as oil prices collapsed...

As we noted in our Bank of Canada Preview report, today’s BOC meeting was never really about if the central bank would raise interest rates (even after last night’s escalation in the global trade war); instead, traders were focused on BOC policymakers’ outlook for future economic growth and what that would mean for interest rates moving forward.

USD/CAD has tentatively broken out above a key descending trendline and triangle consolidation.

The USD/CAD has collapsed after its parabolic rise ended in mid-January, when oil prices first showed signs of stabilisation. Since peaking at just shy of 1.4700, the Loonie has tumbled to below 1.30, hitting a low of 1.2925 last week. It has shed in the process some 1765 pips from the high to the low, or almost 23 per cent in the space of only nine weeks. At the start of this week, the USD/CAD has bounced back somewhat. It is interesting to note that the CAD has weakened here despite the strong Canadian retail sales data that we saw at the end of last week. With oil prices also looking constructive, the rebound in this currency pair looks to be driven by the US dollar rather the Canadian dollar. As such, it is unlikely to last.

As expected, the first major central bank “decision” of the week was not much of a decision at all. Earlier this morning, the Bank of Canada opted to leave interest rates unchanged at 0.50%, as all 11 primary dealers surveyed by the Wall Street Journal expected.

Heading into today’s big BOC decision, it felt like USD/CAD bears just needed to get put out of their misery. After all, the Canadian dollar had lost 11% of its value against the US dollar in last three months alone, to say nothing of the larger move from sub-parity levels in USD/CAD less than three years ago. Of course, the proximate cause of the weakness has been the renewed drop in oil prices, Canada’s most important export. The economic impact of the collapse in oil prices cannot be understated: it has impacted nearly every aspect of the Canadian economy, from employment to manufacturing activity to inflation to consumer confidence.