USD/CAD: Canadian dollar strong rally faces headwinds

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… read more.
on Jun 2, 2021
  • The USD/CAD pair is hovering near its lowest level in almost four years.
  • The Canadian dollar has been helped by strong oil prices and proximity to the US.
  • The pair has formed a bullish divergence pattern on the daily chart.

The USD/CAD is hovering near the lowest level since September 2017 as the Canadian dollar strength accelerates. It is trading at 1.2060, which is 17.7% below the highest point in 2020.

USD/CAD
USD/CAD price action

Canada GDP data

The Canadian dollar is the best-performing currency in the G7 having risen by more than 5%. It is followed closely by the British pound that has jumped by more than 4%.

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There are several reasons why the USD/CAD has continued to decline. First, the loonie has been supported by crude oil prices. The price of West Texas Intermediate (WTI) and Brent surged to the highest level in years after Saudi Arabia and Russia agreed to increase supplies at a slower pace than expected in July. 

The price also jumped after the strong global manufacturing PMI numbers that were published yesterday. Oil prices are important for Canada since the country is the fourth-biggest oil producer in the world.

The USD/CAD has also dropped because of the divergence between the Federal Reserve and the Bank of Canada (BOC). While the Fed has insisted that it won’t tighten soon, the BOC has already started tapering its asset purchases. This is a positive thing for the Canadian dollar.

Meanwhile, the loonie has jumped because of the stimulus measures that the US has taken to deal with the pandemic. The country has implemented a stimulus package worth trillions of dollars this year. This is important for Canada since it is one of the biggest trade partners of the US. 

Most importantly, the pair has fallen because of the weak US dollar. The dollar has dropped against most developed and emerging market currencies.

On Monday, the USD/CAD reacted to the latest Canada GDP numbers. The data showed that the country’s economy rose by 1.4% in the first quarter leading to a 5.6% year-on-year increase. 

USD/CAD technical analysis

USD/CAD
USD/CAD technical chart

The USD/CAD pair is trading at 1.2060. On the daily chart, this price is slightly below the 25-day and 15-day exponential moving averages (EMA). The pair also seems to be forming a falling wedge pattern, which is usually a bullish sign. 

It has also formed a bullish divergence pattern as evidenced by the Relative Strength Index (RSI). Therefore, in June, the pair may bounce back as more buyers come in. If this happens, the pair will likely test the next key resistance at 1.2200.

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