Understanding Drivers Of Market Sentiment For The USD/CAD Pair

Will the USD Rebound Against the CAD?….

The USD/CAD currency pair is currently trading at 1.3111, down 0.03% for the day or C$0.0003. The pair started 2016 at C$1.3900 to the greenback, and it has clawed its way to C$1.2529 on 3 May. Since then, the greenback has reversed course and is looking increasingly bullish against the Canadian dollar a.k.a. the loonie.

This North American currency pair is one of the major currency pairs, as a tremendous volume of trade takes place between the United States of America and Canada – far greater than the US and Mexico on the southern border.

As a case in point, the total value of goods and services trade between the United States and Canada was estimated at $662.7 billion last year, with imports accounting for $325.4 billion and exports accounting for $337.3 billion – all from the US perspective. By contrast, the total value of US exports to Mexico was $236.3774 billion and the total value of imports from Mexico was $294.7411 billion, with a trade deficit of $58.3637 billion. In 2016 for the year to date, US trade in goods with Canada is substantially less, and this is a direct result of the impact of a global slowdown, plunging commodity prices, a USD that has whipsawed in Q1 and Q2 to date, and a host of geopolitical factors including Brexit talks, OPEC uncertainty, fears of an impending recession in the US, and Federal Reserve Bank interest rate decisions.

As can be seen from the above table, the export and import figures are lower for the first quarter of 2016, year on year. The USD/CAD currency chart indicates that the Canadian dollar initially depreciated relative to the USD in January and early February, and then a reversal took place and the Canadian dollar started to appreciate through March, April and early May 2016. That the US dollar has turned course once again and is now appreciating relative to the Canadian currency is largely attributable to the policy approaches adopted by the Bank of Canada and the Federal Reserve Bank. For the upcoming week, the USD/CAD currency pair will likely continue its advance, on the basis that a dovish approach is adopted by the Bank of Canada with its monetary policy. What is likely to help propel the USD/CAD currency pair is the upcoming Federal Reserve Bank decision vis-à-vis interest rates in June. If a hawkish approach is adopted, this will allow the current trend to continue. Presently, the federal funds rate is in the region of 0.25% – 0.50%, and it is possible that a 25-basis point rate hike may be implemented in June. Presently, the percentage likelihood of that occurring according to the latest Bloomberg poll is 18%. On Wednesday, 25 May 2016, the Bank of Canada is expected to retain its current interest rate. A slowdown in job growth in Canada is cause for concern, despite the CPI remaining relatively sticky. This must all be viewed against the backdrop of a global economy that has not shown the robustness and dynamism that is needed to propel economic growth.