USD/CAD Loonie Back to Reality After Big Dollar Recovers

The Loonie hit a six year record for one day gains yesterday (2 percent gain) after the U.S. Federal Reserve statement was announced. The anticipated removal of the word “patient” came to pass, but it was not the only update as the American central bank downgraded forecasts for growth and inflation. A hawkish Federal Reserve in dove’s clothing confused the market and triggered a sell-off of USD across the board. USD/CAD closed the Wednesday trading session at 1.2570 and is now trading around the 1.2732/50 range.

Institutional and retail traders alike were caught wrong footed and speculators took advantage of the scramble and low liquidity to push USD lower. This is one of the unexpected side effects of the Fed moving away from a transparent forward guidance. Chair Yellen quipped that “Just because we removed the word patient from our statement doesn’t mean we’re going to be impatient.” Volatility is back in the markets as the U.S. Central bank continues to move away from forward guidance . Even though the Fed will set expectations on upcoming decisions, the market’s expectations and the Fed’s final statement might diverge creating uncertainty leading up to and after the release.

 

Fundamentals returned to the driver seat this morning as all pairs have begun giving back post-FOMC gains. The Canadian economy continues to struggle after disappointing data and lower commodity prices holding growth back. The Bank of Canada has been proactive and interest cut rates ahead of expectations. The reactions to the FOMC removal of “patient” were short lived and the Canadian dollar heads lower which will give exporters a competitive advantage going forward.

The monetary policies of the Canadian and American central banks are on the opposite sides of the spectrum and that will continue to drive the CAD lower as the currency fails to get any traction from lower commodity prices. Macroeconomic headwinds from Europe and Asia can also limit the upside of a weaker currency.

Pivot Points USD/CAD High: 1.2727 Low: 1.2702

S3 S2 S1 R1 R2 R3
1.2679 1.2691 1.2704 1.2729 1.2741 1.2754

 

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza