USD/CAD: Here’s why the loonie has surged to a four-year high

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his wife, son,… read more.
on May 11, 2021
  • The USD/CAD has been in a strong downward trend in the past few months.
  • This decline is because of the faster recovery of the Canadian economy.
  • The BOC has started to tighten while the Fed has insisted on easy money policies.

The USD/CAD price relentless sell-off accelerated on Tuesday as focus shifted to the upcoming US consumer inflation data. It has declined in the past five consecutive days and is trading at the lowest level since September 2017. 

USD/CAD
USD/CAD price action

Canadian dollar strength accelerates

The Canadian dollar has been in a strong upward trend against the US dollar in the past few months. It has gained by more than 17% in the past 12 months. Further, it has risen in the past five consecutive weeks. 

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There are two primary reasons why the USD/CAD price has continued to drop. First, the Canadian economy has recovered at a relatively faster pace than that of the United States. 

It has been helped by the massive stimulus packages passed by the American government and higher oil prices. The stimulus packages have led to more purchases of Canadian goods by Americans. Further, the price of oil has rallied from the negative zone in 2020 to more than $60. This has benefited Canada since it is the fourth-biggest oil exporter in the world.

Second, the USD/CAD has dropped because of the divergent paths by the Federal Reserve and the Bank of Canada. In its most recent interest rate decision, the Bank of Canada decided to start tapering its quantitative easing program. It also signalled that it would continue tightening its policy in the next few months. 

On the other hand, the Federal Reserve has insisted that it will not hike interest rates in the near term. It has also ruled out against tapering of its asset purchases, citing the unevenness of the American economy.

In the immediate near term, the pair will react to the upcoming US inflation numbers and statements by several Federal Reserve officials. Economists expect that the headline CPI rose by more than 3% in April while core CPI rose  by more than 2%. 

USD/CAD technical analysis

USD/CAD
USD/CAD technical chart

The USD/CAD pair has been on a strong downward trend. On the daily chart, the pair has moved below the short and longer-term moving averages. It has also moved below the lower line of the descending channel while the Relative Strength Index (RSI) has dropped below the oversold level. The fast and slow lines of the MACD have also moved below the neutral line. 

Therefore, the pair will likely continue dropping, with the next target being at 1.1900. However, a move above 1.2200 will signal that there are still sellers left in the market and invalidate the prediction.

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