USD/CAD Loonie Falls as Brexit Fears Rise

The Canadian dollar depreciated against the U.S. dollar after the market’s anxiety with the upcoming Brexit vote has risen following a deadly shooting of a U.K. member of parliament shut down the campaign on both sides of the referendum. The USD rose against all major pairs as a flight to safety was triggered as investors moved into the USD and the JPY. The Bank of Japan (BOJ) kept monetary policy unchanged and with a surprising neutral statement when the market expected some dovish language and even a shock quantitive announcement were not totally unexpected.

Canadian factory sales rose 1 percent in April validating the Bank of Canada (BoC) forecasts of export growth despite macro headwinds. The manufacturing sales beat expectations of a 0.6 percent gain. The BoC was once again warning Canadian about the high levels of household debt, but Governor Stephen Poloz expects the market to cool down as the economy recovers thanks to a boost in exports.

The Federal Open Market Committee (FOMC) statement brought no surprises on Wednesday. The U.S. benchmark interest rate remains unchanged at 0.50 percent. The economic projections were lower than in January and the dot-plot showed one Fed member is only forecasting 1 rate hike in 2016 and none in 2017. The biggest problem facing the Fed next monetary policy decision move is timing. A 25 basis points will not be a global game changer, but it could boost the USD if there is the expectation of higher rates down the line. Right now markets are pricing lower for longer, and pushing government bonds into negative territory in Europe and Japan.

The USD/CAD gained 0.549 percent in the last 24 hours. The currency pair is trading at 1.2956. The USD got a boost from the rise of Brexit fears even after the dovish June FOMC statement and press conference. The USD/CAD broke trough the 1.30 price level and was near 1.31 when the loonie recovered slightly to trade at current levels.

The CAD is getting little support from energy prices. Crude has fallen as Brexit jitters run its course through the market. Gold has been stable as demand for safe haven assets has risen ahead of the historic vote on June 23. For some analysts a United Kingdom exit could spell the beginning of the end for the Eurozone. The polls have painted a too close to call vote with betting odds providing another perspective that while a month ago had a vast majority of Stay in the lead, not is closer to 60 percent and 40 percent for the Leave camp.

West Texas lost 3.707 percent in the last 24 hours. The price of energy has been on a downward slide after surpassing the $50 per barrel price level and is now trading at 46.34. Crude is now at a one month low as Brexit fears put downward pressure on commodities. The supply disruptions that supported the price of oil have started to disappear and with Organization of the Petroleum Exporting Countries (OPEC) and Russia at record level output the supply glut is expected to worsen unless there is a significant pick up in demand. U.S. oil inventories fell by 933,000 when the forecast called for a 2.3 million decrease. Driving season in the U.S. could be another positive factor in the summer, but first the outcome of the Brexit referendum is hanging over commodity prices.

CAD Market events to watch this week:

Friday, June 17
8:30am CAD Core CPI m/m
8:30am USD Building Permits

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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