USD/CAD unable to sustain the rally, bears back in charge

• USD/CAD testing back to the critical support structure on a skittish FX market post the Fed.
• OIl and Canadian GDP next in line as drivers for the currency. 

At the time of writing, USD/CAD is trading at 1.3338 between a range of 1.3332 and 1.3387 following the market’s skittish reaction to a very unclear Federal Reserve, leaning on the dovish side but unable to offer any firm forward guidance.

USD/CAD has seen a couple of round turns in price action in the aftermath of the Federal Reserve announcements. 

Fed key take-aways

• FOMC rate decision (lower bound) actual: 0.00% vs 0.00% previous; est. 0.00%.
• Voted 10-0 for fed funds rate action.
• Fed committed to using a full range of tools to support the US economy.
• Path of the economy will depend significantly on course of coronavirus outbreak.
• The economy picked up in recent months, but still below pre-pandemic levels.
• Following sharp declines, economic activity and employment have picked up somewhat recent months but remain well below their levels at the beginning of the year.

Powell speech highlights

• Powell speech: Pandemic is a disinflationary shock
• Powell speech: High-frequency data showing pace of recovery slowed since mid-June
• Powell speech: Important lending facilities stay in place until economic fallout is behind us

Overall, USD/CAD remains under pressure.as the DXY looks down into the abyss.

However, USD positioning has been moving further into short territory, which could mean that extremes will correct and will result in a bounce in the dollar.

On the other hand, if CAD’s role as a funding currency were to increase, then its potentially lower for longer, especially f the oil market dynamic improve for the Canadian economy.

TD Securities 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.

Canada GDP next key event

Canada’s Gross Domestic Product report for May is due on Friday which could help to boost the CAD 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.

 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