USD/CAD Dives Below 1.2700, Trades at Multi-Year Low

16 Dec 2020 · 3rd Party Analysis

WRITTEN BY ThorFX

In Summary

  • Hopes for a US relief package
  • Covid-19 vaccine administration starts in Canada

The USD/CAD pair reached a 2.5-year low on Tuesday dropping below the 1.2700 marks for the first time since April. The pair has been struggling to make a move to the upside for the past few days. As market participants are looking to find out if the US lawmakers could agree on a stimulus package before the holidays. Recovering oil prices are also affecting the pair’s market value as the Canadian dollar has a strong positive correlation to oil. The WTI crude oil has recently been trading strongly to the upside. Just below the pre-pandemic highs around $47.50 last seen on March 4.

Optimism for an agreement about the US stimulus package deal is also helping the downwards momentum in the USD/CAD. Republicans and Democrats are trying to finalize a bill that would help the US economy in the immediate term.

Restrictions to Drag the Economy

Later on Tuesday, Bank of Canada Governor Tiff Macklem held a press conference. In which he expressed his concerns about the growth of the economy in the near to mid-term future. Governor Macklem warned that the new Covid-19 restrictions counteracting the second wave will certainly drag the economy as it draws closer to the end of the fourth quarter.

Regarding the vaccine rollout, Governor Macklem mentioned that the developments are “tremendously positive” and that “we are going to get out of this”. He expects that normal activity could resume later in 2021. Canada started the vaccine administration on Monday, joining the UK and the USA to give citizens the Covid-19 vaccine developed by Pfizer and BioNTech.

Bullish Trend Continues for the Canadian Dollar

As to Canada’s economic progress for the fourth quarter, Governor Macklem forecasted a growth rate over 1%. On the recent appreciation of the Canadian dollar, he expressed concerns that the expensive loonie is hurting exports. As well as the competitiveness of Canadian companies in the US market.

Despite the dovish statement made by Governor Tiff Macklem, the Canadian dollar continued its bullish trend following the press conference. The USD/CAD pair briefly dipped to a low of 1.2687, marking a low last seen on April 20, 2018. The price has now erased some of the losses and it’s trading back above 1.2700. And it is currently hovering in the region of 1.2720-1.2740.

Heightened Volatility for USD/CAD

The USD/CAD pair could experience heightened volatility later today as a result of the final Fed meeting for 2020. Market participants will be watching the commentary by Fed Chairman Jerome Powell for changes in its bond-buying program in the pandemic-stricken economy. While the virus keeps surging to record levels across the US. Chair Powell is also expected to comment on economic growth forecasts and employment. In its last meeting, the Fed is set to leave interest rates unchanged.

The market will also be looking to find out if the Fed will step in and propose a boost to the markets instead of Congress. On the other hand, however, the Fed could signal no urgency for further support as the US has already begun administering the Covid-19 vaccine two days ago. The central bank has already had a challenging year with $3 trillion added to the balance sheet to stave off the economic crisis, thus increasing its balance sheet from $4.2T in February to over $7T at present.

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