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USD/CAD is trading back down at 1.3357 having attempted to recover from a low of 1.3331, (Loonie’s strongest level since June 10th), yesterday when it reached a high of 1.3407 mid-London.

The Canadian dollar weakened as oil, one of Canada’s major exports, fell. 

There are significant demand worries due to the rise in coronavirus cases worldwide which have ndermined support coming from hopes for additional US economic stimulus measures.

Energy markets are held in check as risk appetite eases, and concerns surrounding demand remain prevalent,

analysts at TD Securities explained.

At the same time, OPEC+ supply is on the rise and US production has ticked higher as well, keeping expectations in check.

However, and what should be immensely positive for the Loonie going forward, the analysts note that shale plays will not be able to significantly grow their production in the coming months.

In this context, a sustained recovery in energy demand could see prices recover further, but for now the lack of such recovery suggest crude oil prices remain range-bound for the time being.  

Greenback bulls step in ahead of the Fed

Meanwhile, the US dollar is attempting to stabilise at the start of a two-day meeting of the US Federal Reserve.

The US dollar has been heavily undermined by the growing numbers of coronavirus cases and the prospects for a protracted economic recession.

It all boils down to the consumer.

Today, the Conference Board measure of consumer confidence has fallen more than expected to 92.6 from 98.3 (consensus 95.0). However, a far more important expectations component dropped 14.6 points to 91.5, casting further doubt on how vigorous the economic recovery will be in the third quarter.    

Plunging consumer expectations have been reflecting anxiety over a pick-up in Covid-19 cases, the reversal of reopening strategies and worries over the financial implications of the conclusion of the $600 a week Federal unemployment payment.

The greenback had otherwise been enjoying demand based on investor’s presumption that the economy would recover a lot faster than other nations. 

However, today’s consumer confidence report seems to suggest we are in the second stage of the crisis and households are probably a lot more anxious, especially for the 30 million who have relied on the $600 unemployment benefits. 

This all makes for a very important event in the Fed this week which will have to address the prospect of a very long bumpy road ahead for the US population. 

Markets will expect for the Fed to confirm recent hints about the benefits of an average inflation target, which would allow rates to stay lower for longer, likely pressuring the greenback, despite it’s trenchantly overstretched short positioning across the financial and commodity complexes. 

Canada GDP could propel the loonie forward

Besides the Fed, Canada’s Gross Domestic Product report for May is due on Friday which could help to boost the Loonie if there are signs that the economy is on track for a recovery.

Canada looks to have firmly transitioned to its recovery phase; we look for industry level GDP to rise 3.9% in May, and data on retail activity and employment point to an acceleration in activity in June.

Consequently, we look for real GDP to contact by 6.8% in 2020, versus the BoC’s forecast of -7.8%,

analysts at TD Securities explained, adding:

 Recent data does however make more accommodative policy (i.e., more credit easing or yield curve control) less likely.

A shallower recession in 2020 could have significant implications for monetary policy in 2021 and 2022 however; because the BoC has tied the overnight rate to the closing of the output gap, the eventual timing of rate hikes will depend crucially on both growth rates and assumptions about economic capacity. We are penciling rate hikes in 2022H2, but plausible scenarios can be constructed arguing for tightening as early as mid-2021 or as late as 2024.

USD/CAD levels