USD/CAD: Loonie Falls Before Bank of Canada Rate Call

The USD/CAD pair rocketed above its tight trading range on Tuesday.

The Memorial Day holiday stateside yesterday ensured trading was thin and it kept the USD/CAD restricted to a narrow range of 1.2270-1.2320.

The USD finished last week strongly after recent U.S. inflation data proved to be higher-than-expected, and thanks to Federal Reserve Chair Janet Yellen’s hawkish remarks about the possibility of an interest rate hike occurring by the end of the year. Canadian inflation, meanwhile, came in slightly under expectations, but it gave the loonie, as the Canadian $1 coin is known, no edge against the greenback.

The Asian market open saw a rapid appreciation of the USD that gathered steam after promising U.S. durable goods data and consumer confidence reports were released. The pair quickly broke through the 1.24 price level and met resistance at 1.2450 before settling in at 1.2420.

Sunny Stephen Forecast to Shine

The Bank of Canada (BoC) will make its monthly monetary policy announcement on May 27 at 10 a.m. ET.

Governor Stephen Poloz, dubbed “Sunny Stephen” by The Economist, remains optimistic the Canadian economy’s export-led recovery will be buoyed further by a weak loonie. Poloz addressed a business audience at Charlottetown, PEI on May 19. At that meeting, he stuck to his forecast for the economy that was released last April, and he is not expected to make any changes to the bank’s benchmark interest rate this week.

To Poloz, a weaker loonie gives Canada a competitive advantage to boost exports, but the fact remains that the Canadian economy is failing to gain traction. The central bank will likely leave its benchmark rate untouched at 0.75%, and though critics are increasingly calling for a rate cut, it could come sooner than a hike since the Canadian economy has stalled. The silver lining is that a flat or slightly positive growth would defy forecasts as the economy has taken the brunt of the oil price decline with a limited impact to productivity.

For now, the loonie will continue to be under pressure. The BoC statement might prove to be the only positive driver of the CAD this week until the release of Canadian gross domestic product (GDP) on Friday. But the U.S. release of their second release of GDP could eclipse that data as they both come out at the same time, and the market has a USD bias.

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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