USD/CAD: Fed meeting and currency pair prospects

 
 
 
 
 
 
 

As a result of last Wednesday's meeting, the Bank of Canada left its key interest rate unchanged at 0.25%, noting that economic growth exceeded expectations. At the same time, Bank of Canada leaders indicated the need for further monetary stimulus measures to ensure employment recovery until significant progress is made towards economic recovery. They also reiterated that the interest rate will remain unchanged until annual inflation reaches the 2.0% target sustainably, which may not happen until 2023.

"A significant share of the economy's resources are still not being used. In addition, there is increased uncertainty about the situation with the coronavirus and the trajectory of economic growth", the Bank of Canada said, adding that, based on the latest data, according to which employment by 4.5 % below pre-coronavirus levels, the labor market is far from full recovery.

The Bank of Canada's decision had only a short-term negative impact on the CAD. In general, its positive dynamics continues, supported by the growing world stock market and rising oil prices. The outlook for the Canadian economy has improved substantially, with Q4 GDP growth well above the central bank's forecasts, and indicators point to economic growth in Q1 2021.

Canadian government bond yields have surged in recent weeks as investors expect inflation to accelerate and the economic recovery to pick up steam. These factors contribute to the further strengthening of the CAD, which is among the leaders of growth against the US dollar.

Still, the Canadian dollar weakened and the USD / CAD rose during today's Asian session and early European session amid falling oil prices, a correction in the global stock market and a strengthening US dollar.

Financial market participants are waiting for the end of the Fed meeting, which will end today with the publication of the rate decision at 18:00 (GMT). The Fed's new economic forecasts will also be published.

The Fed is expected to raise forecasts for economic growth, however, it will not change the parameters of monetary policy. Following the meeting, Fed Chairman Jerome Powell is likely to emphasize that the central bank will continue to support the economy and pay attention to the rise in bond yields. If there are no such statements, the yield on US government bonds will continue to grow, and the dollar will strengthen.

Even with low inflation forecasts and signals from the Fed about the inclination to soft policy, many economists believe that the balance of risks for the dollar in the current situation is shifted towards its growth. However, strong growth of the US dollar, in their opinion, is unlikely, as the global economic recovery weakens the demand for safe-haven assets.

As for the USD / CAD pair, it is likely that its bearish trend will continue for the time being amid a decrease in the rate of coronavirus infection, easing of quarantine measures and continued growth in stock indices and commodity prices, primarily oil.

At the start of today's European session, the USD / CAD was traded near 1.2468 mark, 25 pips above today's opening price, but still maintaining a multi-month downtrend.