The Canadian dollar's recovery from its mid-April lows has stalled this week. The market's main focus was on the "resilient" U.S. economic data, rising bond yields, and the ongoing market reassessment of the risks of the Federal Reserve lowering rates over the next few months. Comments from Fed officials have not clarified the situation and have only increased concerns.
Canada has released mixed reports. Retail sales for March suddenly declined -0.2% month-over-month, which is worse than February's figure. According to figures released Tuesday, Canada's industrial product price index surprisingly rose 1.5% in April from 0.6%, and the raw materials price index jumped 5.5% against the forecast of 3.2%.
The Bank of Canada is set to make a rate announcement on June 5. While the central bank could possibly announce the start of a rate-cutting cycle, it will not increase it either. There is no consensus, but Friday might bring more clarity as GDP data will be released. If the figures come in higher than expected, the likelihood of a rate cut will decrease, and the CAD could rise.
The Canadian dollar is the only commodity currency whose overall speculative positioning against the dollar continues to deteriorate. The net short CAD position increased by $769 million to -$6.65 billion over the reporting week, with the price heading upwards, away from the long-term average.
USD/CAD, having corrected after reaching 1.3844, continues to trade in a sideways range. Risk appetite has barely affected the Canadian dollar, which is under pressure due to the threat of reduced demand from the US. Canadian exports are predominantly oriented toward the US market, so the delay in the Fed's decision to start a rate-cutting cycle weighs on the loonie.
In November-December, USD/CAD actively fell as the market was confident in the imminent start of the Fed's rate-cutting cycle, which would have led to an easing of financial conditions and, consequently, an increase in demand. However, the loonie started to weaken as soon as it became clear that rates would not be reduced.
We assume that there are still no strong reasons for a significant move in either direction, and the pair will continue to trade within the broad range of 1.3590 to 1.3760, with a gradual shift expected toward the upper boundary of the range.