The Canadian dollar continues to show sharp volatility this week. USD/CAD has jumped 0.65% today and is trading at 1.3693.
We are seeing significant volatility in the currency markets this week, with weaker risk appetite propelling the US dollar higher. The Canadian dollar been hit by the double whammy of an aggressive Federal Reserve and an escalation in the war in Ukraine which has dampened risk appetite. It has been a miserable September for the Canadian dollar, as USD/CAD has climbed 4.5%.
There are additional headwinds for the Canadian dollar. The Bank of Canada has led the way with a fast pace of tightening, raising its benchmark rate to 3.25%. The Federal Reserve has caught up with last week’s 0.75% hike, and the markets are pricing in a higher terminal rate for the US than for Canada (4.60% vs. 4.10%). This means that the Canadian dollar will not benefit from a higher interest rate differential, and Canadian bond yields have fallen below US Treasuries. As well, Canada is a major oil exporter and the drop in the price of oil is weighing on the Canadian dollar. We are already seeing a sharp drop in long positions in the Canadian dollar, and that trend could continue.
Markets brace for decline in GDP
Canada releases the July GDP report later today. The economy is showing little movement and gained a negligible 0.1% in June. The consensus for July is a decline of 0.1%. A sharper drop than expected could sour investors on the Canadian economy and extend the Canadian dollar’s losses.
- USD is testing resistance at 1.3725. The next resistance line is 1.3862
- There is support at 1.3477 and 1.3340