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Analysts at MUFG Bank, consider that the USD/CAD pair will likely extend the current rally back towards the December 2018 high at 1.3665.

Key Quotes: 

“The CAD has been under more intense selling pressure over the past week as fears over the hit to global growth from COVID-19 disruption have continued to build. It has resulted in USD/CAD rising to its highest level since the middle of 2019. After breaking to upside out of the range between 1.3000 and 1.3350 which had held for almost nine months, the next key resistance level for USD/CAD is provided by the May 2019 high at 1.3565, and then beyond by the December 2018 high at 1.3665.”

“The CAD is being undermined by the pick-up in financial market volatility which is triggering an unwinding of carry trades. The CAD has been the highest yielding currency within the G10. It also leaves more scope for the BoC to lower rates in response to the negative growth shock from the COVID-19 disruption. The compression of yield spreads should weaken the CAD’s appeal more broadly. The BoC’s policy meeting in the week ahead will provide the first key test of how proactive their response will be. The BoC opened the door to cuts at their last meeting if weak growth proved more persistent. Recent COVID-19 and rail disruptions have since increased downside risks. An imminent rate cut rather than waiting for more info would further encourage market expectations for multiple rate cuts this year.”