The Canadian dollar finds itself on the back foot once again. The good days that followed the strong GDP as well as the upbeat message from the BOC may be over.
USD/CAD is trading at 1.2665, which is high resistance. Here are three reasons for the recent weakness.
- USD strength: First and foremost, the US dollar is just storming the board. EUR/USD is near a 12 year low, and AUD/USD also broke the floor. Even if the Canadian economy gains from a stronger US one, the domestic currency is pushed lower.
- Oil: For quite a few months, the loonie traded in tandem with oil prices. While oil prices have stabilized and rig count is lower, US oil production is still on an upwards trajectory. In addition, OPEC signaled that no change in policy is expected in the June meeting. More supply means lower prices for Canada’s critical export.
- Domestic weakness: Not all is well in Canada: housing starts fell sharply to 156K, much lower than 176K expected or 187K in the previous months. The harsh winter can be blamed for this, but we also know that Canadian housing was steaming hot for too long, and might begin unwinding now.
1.2665 capped the pair in late February. At the time of writing, USD/CAD is attempting a move higher. The round number of 1.28 is critical resistance on the topside.
On the downside, minor support awaits at 1.2620, followed by more serious support at 1.2560. The round number of 1.25 was formerly a pivotal line.
Here is how it looks on the chart:
