Why the American Dollar Is Appreciating Against the Loonie?
- The USD/CAD is testing the monthly resistance 1.4080
- An inverse correlation between oil and USD/CAD
- Bank of Canada launches a buy back program of governmental securities
Monthly Time Frame:
Looking at the wider picture using the monthly chart for the USD/CAD, it is clear that the price is ranging between two levels the 1.4080 and 1.2085.
In April, the US Dollar managed to break the resistance to continue its direction upward trying to reach the previous high (1.4660).
4-Hr Time Frame:
A closer look at a lower time frame, the 4hr chart has many things to tell us. USD/CAD was able to break the downtrend (white line), and even close above the monthly resistance (1.4080).
Moreover, big bullish candles appeared after the breakout which indicates that the momentum is in the favour of the bulls. If the Loonie depreciates in the next few days, we might see the USD/CAD reaching the 1.4665 level.
Another factor that led to the depreciation of the Canadian dollar against the USD, is the sharp drop in oil prices. Since the start of the worldwide lockdown, the demand for oil decreased as many industries were closed down and production suspended.
Historically, there was a positive correlation between the Canadian dollar and the prices of oil. As displayed on the chart above, last weeks the oil depreciated dramatically which led the Loonie to drop as well, causing the US dollar to appreciate against the Canadian dollar.
On Wednesday, the Bank of Canada (BOC) declared that it would leave the overnight rate steady with 1.4%.
As well, the BOC stated that in March, more than one million Canadians lost their jobs, and in April another six million had filed for CERB (Canada Emergency Response Benefit).
In addition, the Bank of Canada already launched a program by purchasing five billion dollars of government securities each week. The bank conducted a 200-billion-dollar program to lend to the financial institutions for stimulating the economy and restore growth.
The Canadian Central Bank has offered to buy back bonds, as a way to provide liquidity to the market. This will encourage borrowing, help to fight the slow economy, and avoid high inflation.
Although Canada has not been as dramatically affected by coronavirus as the United States, the USD is still showing more power over the Loonie as shown technically on the graph.
Quantitative easing implemented by BOC led to the depreciation of the Canadian dollar and gave the chance for the dollar to appreciate. The news and technical analysis are showing that the direction of the USD/CAD will likely be upward in the next few weeks.