The Canadian dollar, paired with the US currency, has been consistently strengthening its position for several months. The USD/CAD pair has been gradually declining since November 2020, updating more and more new price lows. If the loonie was in the middle of the 33rd figure on November 1, 2020, then at the end of May, it "landed" at the base of the 20th price level. That is, for six months, the pair plunged by almost one and a half thousand points. However, since mid-May, the pair has actually been marking time in one place – the USD/CAD bears have tried to overcome the psychologically important support level of 1.2000, but they were always unsuccessful. As soon as the pair crosses the key target, the bears lock in profits, holding back the loonie from developing its success. The bulls seize the initiative, rising to the level of 1.2150. However, in this price area, the upward momentum similarly fades: the US dollar is too vulnerable (especially when paired with the loonie) to claim a trend reversal.
The main driver of the downward movement of USD/CAD is the Bank of Canada. The difference in the approaches of the Federal Reserve and the Canadian central bank strengthens the loonie's position. The US Fed, despite the growth of the main indicators of the economy, voices dovish rhetoric (and, accordingly, maintains the policy of monetary stimulus). The Canadian central bank, in turn, took a step towards normalizing monetary policy. So, at the last meeting, which took place at the end of April, the Bank of Canada reduced the volume of the asset purchase program by 1 billion, while revising its forecast regarding the timing of the rate hike. If in March the central bank did not plan to raise rates until 2023, then in April, members of the central bank admitted that such a decision could be made in the second half of next year.
In subsequent comments, the head of the Bank of Canada noted that further correction of the QE program will take place "smoothly and gradually." At the same time, it stressed that subsequent decisions will be made based on the results of the analysis of incoming data.
Since the last meeting, key macroeconomic data on the labor market and inflation have been published. Thus, the consumer price index came out in the green zone, reaching 0.5% (with growth forecast to 0.2%). In annual terms, the indicator also showed strong growth, marking 3.4% (a multi-year high). The core CPI, which excludes food and energy, jumped to 2.3%, with a growth forecast of 1.3%.
The latest data on Canadian GDP growth is also on the loonie's side. The Canadian currency reacted positively to this publication, although not all components of the release came out in the green zone. In March, the country's economy increased by 1.1% (on a monthly basis). The annual rate for the first quarter fell short of the forecast level, being at the level of 5.6%, while growth was forecast to reach 6.8%.
The Canadian Nonfarm also left a double impression. The unemployment rate came out at the forecast level, rising to the target of 8.2% (in the previous month, the indicator was at the level of 8.1%). At the same time, the growth rate of the number of employees decreased by 68,000 (a decline of 23,000 was predicted). Both the part-time and full-time components showed negative dynamics. The share of the economically active population also declined to 64.6% (the weakest result since August 2020).
As we can see, the key macroeconomic reports are contradictory, so the intrigue regarding the results of tomorrow's meeting remains.
In my opinion, the June meeting will be a "pass-through": the central bank will take a wait-and-see position, while the disappointing labor market report will be ignored. The fact is that the April Nonfarm became a victim of quarantine restrictions that were introduced in April. In particular, during this period, the most populous and second largest province in Canada, Ontario, announced a four-week lockdown to slow the spread of the coronavirus. All retail stores (except grocery stores and pharmacies) were closed in April. Also, all hairdressers, beauty salons, gyms, cinemas, etc. were closed. Restaurants and cafes were allowed to sell takeaway food and drinks only.
At the moment, all these quarantine restrictions do not apply, but the members of the central bank will have to operate on the April report (the May figures have not yet been published), which are distorted. Therefore, in my opinion, the Bank of Canada will take into account the "coronavirus force majeure" and maintain a hawkish attitude – at least in the context of the declared intentions. If the central bank does not rule out a further QE correction in the coming months, then the USD/CAD pair will test the 19th figure again.
From a technical point of view, the pair on all higher timeframes (from H4 and higher) is either on the lower line of the Bollinger Bands indicator, or between the middle and lower lines, which indicates the priority of the downward direction. On the W1 and MN timeframes, the Ichimoku indicator formed a bearish Parade of Lines signal when the price was below all the indicator lines, including the Kumo cloud. This signal indicates bearish sentiment. Major support is at 1.1950 (bottom line of the Bollinger Bands on the weekly chart). It is important for the bears to surpass this target in order to settle within the 19th figure and indicate further downward prospects. It is likely that the downward momentum will fade in the 1.1950 target area, given the fact that members of the US Federal Reserve will indicate their position next week.