03.07.202015:47 Forex Analysis & Reviews: USD / CAD. Loonie plunges amid weak economic data

Exchange Rates 03.07.2020 analysis

At first glance, the reaction of loonie to the published data seems illogical. After all, the April figures reflected a record decline in the Canadian economy in the entire history of observations. Canada's GDP fell in April by 11.6%, while in March a decrease of 7.5% was recorded (the indicator was revised downward from -7.2%). In annual terms, the key indicator collapsed by 17.1% (which was in line with the expectations of most experts), while in March the annual indicator fell by 5.8%. The main spheres of the economy showed the most negative dynamics. The manufacturing sector decreased by 22.5%, the construction sector by 22.9%, and the retail sector by 23%. But all these disastrous figures were ignored by the market.

Moreover, after a failed release, the USD/CAD pair moved downward, and impulse decreased to the area of the 35th figure, where it remains until now. In my opinion, traders have shifted their focus from April data to more distant prospects. The fact is that preliminary data for May were published on the same date of release. According to these estimates, GDP growth of 3% in May will be recorded in monthly terms. Given the unprecedented coronavirus crisis, many traders were ready to see a record decline in the Canadian economy in April, especially since this release was published after similar releases in other major countries of the world.

Investors are now primarily interested in the dynamics of recovery. As preliminary, as well as indirect (but more operational) indicators show, that the Canadian economy is already recovering. For example, manufacturing PMI rose in June to 47.8 points. And although this indicator has not crossed the key 50-point mark, the dynamics itself speaks of positive trends (in May, the PMI reached 40.6 points). The component of new orders (45.5 points from the previous value of 37.9 points) and the employment component also increased. It is worth noting that this indicator came out at almost the same level as a year ago. In June 2019, it amounted to 49.2 points.

Considering the prospects of the USD/CAD pair, it is necessary to recall the results of the last meeting of the Bank of Canada. The rhetoric of the accompanying statement was quite optimistic and was in favor of the loonie. First, the Central Bank said that the negative impact of the pandemic has peaked, although the process of global economic recovery will be slower than earlier forecasts. Secondly, regulator members recognized that the Canadian economy seems to have managed to avoid the worst-case scenario - that is, the scenario that was announced in the bank's monetary policy report in April. Well, the Central Bank published a forecast regarding the growth of the Canadian economy in the third quarter. According to the regulator's members, a sharp economic growth will follow in the second half of the year, "especially if the oil market continues to show positive dynamics".

Exchange Rates 03.07.2020 analysis

The oil market is really showing good dynamics. A decrease in commercial stocks of raw materials in the United States, as well as a recovery in demand from China, are supporting oil prices. The "black gold" market reacts quite nervously to the theme of coronavirus (especially against the background of an increase in daily cases of Covid-19 infection in the world), but in general quotes "stay afloat" - Brent in the range of 40–42 dollars per barrel, WTI - $ 30– 40 per barrel.

Uncertain positions of the US dollar also contributed, adding to the overall fundamental picture for the pair. Even yesterday's Nonpharma, which by and large turned out to be quite good, did not help the pair's bulls. After an impulse surge to the level of 1.3615, the price again returned to the area of the frame of the 35th figure. All this suggests that the greenback today is not able to organize its own offensive - at least in relation to the loonie.

Thus, the fundamental background helps to further reduce the USD/CAD pair. True, for this, the bears need to gain a foothold below 1.3550, where the middle line of the BB indicator on the daily chart passes. Now the price is slightly higher, so sales look somewhat risky. But as soon as the pair falls below the indicated target, it will be possible to consider short positions with the main target at around 1.3410 - this is a three-week price low that coincides with the lower line of the Bollinger Bands indicator on D1.

*Analiza tržišta koja se ovde nalazi namenjena je boljem razumevanju tržišta i ne pruža instrukcije za vršenje trgovanja.

Irina Manzenko,
Analytical expert of InstaForex
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