USD/CAD Rebound from April Low Unravels Ahead of Canada Employment

Canadian Dollar Talking Points

USD/CAD struggles to preserve the rebound from the April low (1.3850) even though the Bank of Canada (BoC) pledges to “do its part to bridge this period and support a lasting recovery,” but the Canadian Dollar may face headwinds later this week as the update to Canada’s Employment report is anticipated to show a 4.0 million contraction in April.

USD/CAD Rebound from April Low Unravels Ahead of Canada Employment

USD/CAD may consolidate over the coming days as it snaps the series of higher highs and lows from the previous week, but fresh data prints coming out of Canada may drag on the Canadian Dollar as the Employment report is expected to show the biggest decline since the series began in 1976.

The economic shock from COVID-19 may force the BoC to further support the economy as Deputy Governor Carolyn Wilkins warns that “this situation will cause Canadian gross domestic product to plunge as much as 15 to 30 percent in the second quarter from its level in late 2019,”with the official going onto say that the “lost output will be made up only gradually as containment measures are lifted.”

In turn, Ms. Wilkins argues that “there is more to be done” amid the uncertainty surrounding the economic outlook, and the BoC may continue to utilize its non-standard measures throughout 2020 as “there will likely be other headwinds, such as low energy prices.”

As a result, the BoC may retain a dovish forward guidance at its next meeting on June 3, but it remains to be seen if the central bank under Tiff Macklem will continue to push monetary policy into uncharted territory as the “Governing Council stands ready to adjust the scale or duration of its programs if necessary.”

With that said, the broader outlook for USD/CAD remains constructive as the BoC keeps the door open to deploy more unconventional tools, but the rebound from the April low (1.3850) may continue to unravel over the coming days as the exchange rate snaps the series of higher highs and lows from the previous week.

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USD/CAD Rate Daily Chart

Source: Trading View

• Keep in mind, the near-term rally in USD/CAD emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the yearly opening range highlighting a similar dynamic as the exchange rate failed to test the 2019 low (1.2952) during the first full week of January.
• The shift in USD/CAD behavior may persist in 2020 as the exchange rate breaks out of the range bound price action from the fourth quarter of 2019 and clears the October high (1.3383).
• However, recent price action warns of range bound conditions as the break of the descending channel formation failed to produce a test of the April high (1.4298), with USD/CAD snapping the series of higher highs and lows from the previous week amid the lack of momentum to break/close above the Fibonacci overlap around 1.4130 (100% expansion) to 1.4140 (161.8% expansion).
• Failure to hold above the 1.4010 (38.2% retracement) to 1.4040 (23.6% retracement) region may spur a more meaningful run at the Fibonacci overlap around 1.3810 (50% retracement) to 1.3830 (100% expansion), which sits just below the April low (1.3850), with the next area of interest coming in around 1.3730 (78.6% expansion).

--- Written by David Song, Currency Strategist

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