The Canadian dollar slides, the GDP then
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The Canadian dollar continues to show high volatility this week. USD/CAD jumped 0.65% today and is trading at 1.3693.
We are seeing significant volatility in the currency markets this week, with lower risk appetite propelling the US Dollar higher. The Canadian dollar was hit by the double whammy of an aggressive Federal Reserve and an escalating war in Ukraine which dampened risk appetite. September was a miserable month for the Canadian dollar, with USD/CAD climbing 4.5%.
There are other headwinds for the Canadian dollar. The Bank of Canada led the way with a rapid tightening pace, raising its key rate to 3.25%. The Federal Reserve has caught up with last week’s 0.75% rise and markets are pricing in a higher terminal rate for the US than for Canada (4.60% vs. 4.10%). This means the Canadian dollar will not benefit from a higher interest rate differential and Canadian bond yields have fallen below US Treasuries. In addition, Canada is a major oil exporter and the fall in the price of oil is weighing on the Canadian dollar. We are already witnessing a sharp drop in long positions on the Canadian dollar and this trend could continue.
Markets brace for lower GDP
Canada releases the July GDP report later today. The economy shows little movement and gained a negligible 0.1% gain in June. The consensus for July is a decline of 0.1%. A steeper-than-expected decline could sour investors on the Canadian economy and prolong the Canadian dollar’s losses.
- The USD is testing resistance at 1.3725. The next resistance line is 1.3862
- There is support at 1.3477 and 1.3340
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