Here’s why the USD/CAD has plunged ahead of BOC interest rate decision

Here’s why the USD/CAD has plunged ahead of BOC interest rate decision
  • The USD/CAD has declined to the lowest level since March 9 ahead of the BOC interest rate decision.
  • The downward momentum is primarily because of the surging crude oil price.
  • It is also because of the flattening of the coronavirus curve in Canada and the reopening.

The USD/CAD is trading at its lowest level since March 8 ahead of the BOC interest rate decision. The pair is reacting to the rising crude oil prices and the falling coronavirus cases. The pair is trading at 1.3512 and is down by almost 5 per cent, making the loonie one of the best-performing currencies in the developed world.

USD/CAD falls
USD/CAD falls to March lows

USD/CAD slips as crude oil price surge

The main reason why the USD/CAD is plunging is the rising crude oil prices. That matters for the pair because Canada is the fourth-biggest oil producer in the world. According to the EIA, the country produces more than 5 million barrels every day.

In recent weeks, the price of crude oil has been in an unhinged rally. The West Texas Intermediate (WTI), which turned negative in May is now trading at $36.42 while Brent is trading at almost $40. Indeed, May was the best week for oil prices ever.

There are several reasons why crude oil price has been rallying. First, there are signs that demand is increasing as more countries move to reopen their economies. According to Bloomberg, demand from China is approaching its pre-virus levels. Another report released today showed that auto sales in the country rose by more than 11% in May. Other countries like the US, New Zealand, and Australia have started to reopen.

Second, crude oil price has jumped because of the decline in production. While OPEC+ members have been slashing production, others like the US, Canada, and Norway have been cutting as well. According to Baker Hughes, the number of active oil rigs in the US has been falling at the fastest rate on record.

Finally, there are hopes that OPEC+ members will extend the supply cuts when they meet next week. The chart below shows the inverse relationship between crude oil price and the USD/CAD pair.

Crude oil price vs USD/CAD
Inverse relationship between crude oil price and USD/CAD

Coronavirus cases start to fall

The USD/CAD has been falling because of the improving situation in Canada. Data from the government shows that the number of active cases in the country has been on a downward trend. For example, the country confirmed 758 cases in the country, down from 2,760 a month ago. As a result, the country has been reopening, the economy.

While the coronavirus continues to be a threat to the country, the falling number of cases is a positive thing for the Canadian dollar.

The chart below shows that the curve is flattening in Canada.

Canada active cases
Active coronavirus cases in Canada

USD/CAD eyes BOC interest rate decision

The USD/CAD pair is now eying the interest rate decision by the Bank of Canada that will happen tomorrow. This will be the first monetary policy by Tiff Macklem, who has replaced Stephen Poloz, who retired last week.

The BOC has taken several actions to cushion the economy from the pandemic. It has lowered rates to 0.25% and initiated $5 billion a week asset purchases. In addition, the bank has taken more action to participate in the treasury bills auctions and in the provincial debt market. Further, it is buying high-grade corporate bonds worth more than $10 billion.

Most importantly, it has provided adequate liquidity to help banks lend money to small and medium enterprises. All this has led to a significant jump in Bank of Canada balance sheet as shown below.

Bank of Canada balance sheet
Bank of Canada balance sheet

Most analysts expect the new governor to leave rates unchanged at 0.25% and commit to his predecessor’s policies. Still, most analysts will be paying a close attention to whether he will talk about negative rates.

USD/CAD technical outlook

USD/CAD technical analysis

On the daily chart, the USD/CAD has been on a steep downward trend and is now at the lowest level since March 9. The price is below the 50-day and 100-day exponential moving averages while the RSI has just moved below the oversold level of 30. Similarly, it has moved below the 61.8% Fibonacci retracement level. Therefore, there is a likelihood that the pair will continue falling ahead of the OPEC+ meeting.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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