USD/CAD Rate to Face Record Decline in Canada GDP

Canadian Dollar Talking Points

USD/CAD continues to track the April range even though Bank of Canada (BoC) Governor Stephen Poloz endorses a dovish forward guidance ahead of his departure, but Canada’s 1Q Gross Domestic Product (GDP) report may influence the exchange rate as the update is expected to show the biggest contraction since the data series began in 1961.

USD/CAD Rate to Face Record Decline in Canada GDP

USD/CAD appears to be stuck in a narrow range as Governor Poloz defends the response to COVID-19, with the central bank head insisting that “a well-functioning financial system is a necessary precondition for effective monetary policy.”

Governor Poloz states that the BoC is “focusing our efforts on making sure the economy has a solid base for recovery” as the central bank expands its balance sheet, but warns that “the economy will need significant monetary stimulus in the rebuilding stage” as he prepares to step down in June.

It remains to be seen if the BoC under Tiff Macklem will deploy more unconventional tools over the coming months as Canada’s GDP report is anticipated to show a 10% decline in the growth rate, and the central bank may come under pressure to further support the economy as “there will be lessons to learn from how supply chains evolve” following the pandemic.

In turn, the BoC may continue to endorse a dovish forward guidance at the next meeting on June 3, but the Governing Council may carry out a wait-and-see approach for the foreseeable future as the central bank prepares to launch the Provincial Bond Purchase Program along with the Corporate Bond Purchase Program.

With that said, the Canadian Dollar may face headwinds throughout 2020 as the BoC keeps the door open to implement more non-standard measures, and the broader outlook for USD/CAD remains constructive as the exchange rate breaks out of the descending channel from earlier this year.

However, USD/CAD may continue to consolidate over the remainder of the month as it preserves the April range, with the failed attempt to test the April low (1.3850) bringing the May high (1.4173) on the radar.

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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 the recent decline in USD/CAD sputtering ahead of the April low (1.3850).
• In turn, USD/CAD may trade within a more defined range as it continues to hold above the Fibonacci overlap around 1.3810 (50% retracement) to 1.3840 (100% expansion), with a move above the 1.4010 (38.2% retracement) to 1.4040 (23.6% retracement) region bringing the 1.4130 (100% expansion) to 1.4150 (161.8% expansion) area on the radar as it largely lines up with the May high (1.4173).

--- Written by David Song, Currency Strategist

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