FX.co ★ USD/CAD. Bank of Canada will follow the Fed's lead

There is an expression: "when the US catches a cold, Canada sneezes." They say that this phrase was born almost at the dawn of the first trade relations between the two countries. Given the degree of economic integration, this expression has become more relevant in modern conditions. The recent events have vividly confirmed this fact.

The coronavirus crisis, which has affected most countries in the world, has not spared the United States. In the second quarter, the US economy slowed by more than a third (31%), reflecting the effects of lockdown and unemployment. The Canadian economy has followed this course: according to the latest data, Canada's GDP contracted 38.7% in the second quarter. The structure of the indicator suggests that household spending declined to a record low of 13.1% (q/q) amid rising unemployment and lockdown. Thus, people took care of their savings by minimizing their consumer activity – closed shops, restaurants and travel agencies have contributed to this process. Business investments in fixed assets also declined by 16.2%, which is a historical anti-record for the entire history of observations. Government spending declined by 2/7% after cutting 0.3% in the first quarter, while exports fell by 18% and imports by 22%. This is expected, as the economies of Canada's largest trading partners are slowing down.

The above figures were not surprising, and so did not affect CAD's position. On the contrary, it showed growth, since GDP growth in June amounted to 6.5% in monthly terms, while the experts' forecast was 5.6%.

However, the USD/CAD pair failed to overcome the strong support level of 1.3000. The bears tested the 29th figure, but returned immediately. Firstly, traders began to take profits and open longs, and secondly, the Bank of Canada sounded quite alarming signals for the Canadian dollar.

It is worth recalling that Fed's head announced last week that the regulator decided to revise the strategy of the American Central Bank. In fact, the new strategy of the Federal Reserve significantly postpones the possible date of monetary tightening. Although we are not talking about 3% inflation, the regulator still raised the bar, and after exceeding which, the Fed members will return to the issue of raising the rate. The US dollar, in turn, reacted extremely negatively to such news, collapsing throughout the market, which includes the pair with the Canadian dollar. As a result, the indicated pair updated 8-month lows, reaching the level of 1.2990.

On the other hand, Carolyn Wilkins, announced that the Bank of Canada could duplicate the strategy of the American regulator. She said that alternative instruments of monetary policy could possibly include targeting average inflation, targeting the price level, a dual mandate to increase employment and control inflation, and targeting nominal GDP. And although she said this hypothetically, we did not wait long for the result: the USD/CAD pair fell by 150 points.

At the moment, the upward impulse of USD/CAD has faded. The CAD, like all dollar pairs, paused as it awaits Nonfarm. The traders, in turn, are waiting not only for US Nonfarms, but also Canadian ones. If the Canadian labor market will be disappointing, the upward dynamics may continue. According to preliminary forecasts, the unemployment rate in August will decline to a low to 10.1% (in July, a decline was recorded to 10.9%). The number of employed people should rise by 260 thousand. This is a decent growth rate, although this figure showed a more significant result in July - 420 thousand. In other words, if today's release comes out at least at the level of forecasts (and even more so in the "green zone"), the USD/CAD pair will settle in the 30th figure again - a decline to a local low of 1.3030 is possible. Otherwise, the Canadian currency will at least test the resistance level of 1.3160 (the average line of the Bollinger Bands indicator on the daily chart) and possibly the resistance level of 1.3220 (the Kijun-sen line on the same timeframe) – especially if the US Nonfarm are in favor of the US currency.

As you can see, the level of uncertainty is now quite high: the dynamics of the USD/CAD pair will depend not only on Canadian data on the labor market, but also on American data. But it is difficult to predict which of the releases will make the greatest impression on investors. Therefore, trading decisions on a pair should be made after the market decides in which direction the swing will be - either in favor of the US dollar or in favor of the Canadian dollar. Technically, there is also no certainty: the USD/CAD pair on the daily chart is located near the middle line of the Bollinger Bands indicator and on the Tenkan-sen line. The trend indicators are still "silent" and show any clear signals. In this case, you should focus on Nonfarm, which is the fundamental background for the pair.