- USD/CAD trades broadly flat on Wednesday, despite US dollar bears pushing the Dollar Index below 92.00.
- CAD was thus one of the worst-performing G10 currencies, alongside USD and JPY.
- Reasons for CAD underperformance likely to do with 1) month end flows, 2) technicals and 3) Covid-19 concerns.
A few reasons for CAD underperformance…
1) Wednesday was ostensibly the final “proper” trading day of the month; Thursday is a half-day in the US, meaning low volume. Friday is the day after Thanksgiving, which many in the US will likely be taking off, meaning low volume. Next Monday (30 November) is likely to also be a sleepy affair. Thus, many participants are likely to have been inclined to get their month-end rebalancing requirements ticked off on Wednesday and markets did see quite a choppy 16:00GMT London fix. Not that unpredictable month-end flow volatility won’t continue over the next three trading days, but this likely had something to do with CAD downside today.
2) New Covid-19 infections have continued to increase over recent weeks, hitting all-time highs above 7K on Monday. Provinces are one by one imposing greater restrictions, with Alberta declaring a health emergency on Tuesday and banning all indoor social gatherings. Another factor to consider is the fact that, as Canadian PM Trudeau warned Canadian on Wednesday, Canada does not have any domestic vaccine production capabilities and thus is not going to be at the front of the queue compared to other developed nations (such as the US and UK) when it comes to receiving their vaccine orders. This might weigh on Canada’s economic recovery vs some of its peers, weighing on CAD.
USD/CAD struggles to push below psychological 1.3000
3) Finally, the technical point. USD/CAD hit a big level of support on Tuesday, the psychological 1.3000 level. The pair has struggled to push below this level on Wednesday, only managing to print around 1.2987 before reverting back to the big figure. With USD/CAD sat towards the bottom of a recent downwards trend channel, unless it can also break to the south of this, further near-term downside is going to be a struggle. Still, the long-term technical bias for the pair does still point to the downside. If USD/CAD can break below 1.3000 convincingly, this would open up the door to a test of lows of the month around 1.2930.
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