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The Loonie Strengthens On the Back of Boc’s Hawkish Stance as Tensions Rise Between China and Australia

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The Loonie Strengthens On the Back of Boc’s Hawkish Stance as Tensions Rise Between China and Australia
  • The Bank of Canada (BoC) anticipates the economy to recover from the coronavirus pandemic fully by the end of this year. For this reason, the Bank is tapering the stimulus program that it instituted in the wake of the pandemic.
  • Investors support the BoC’s move, and their approval is manifested in the flight to the Canadian dollar immediately after the statement. The loonie climbed 0.9% against the US dollar, registering the biggest margin of growth since June 2020.

Canada’s economy is ready to go back to normal operation. This is the view of the Monetary Policy Committee (MPC) of the Bank of Canada. At the center of the BoC’s argument is the view that the outlook for both the Canadian and global economies is improving. Activity is strengthening in the country despite a devastating third wave of the Covid-19 pandemic. In this light, the Bank thinks the evolution of the pandemic should determine the pace of recovery.

Because of the stance, the BoC stayed the lower bound of the target overnight rate at 0.25%. The deposit rate is also at 0.25%, while the bank rate is at 0.5%. Also, the bank will dial down the weekly net purchases of government debt to C$3 billion. The adjustment will be conducted each week according to the prevailing economic conditions.

Interestingly, the market agrees with the BoC’s stance if the recent CAD/USD price action is anything to go by. The loonie expanded 0.89% to 0.8024 against the US dollar after the statement. However, the currency had pared 0.10% of the gains by the time the Asian markets opened on Thursday. 

CAD/USD chart

Figure 1: CAD/USD

Has loonie’s strengthening jeopardized the greenback’s advance?

Before the BoC statement, the US dollar was gaining valuable ground against the Canadian dollar. The MACD in the figure below shows selling pressure mounting against the CAD since April 19. Investors had anticipated a continuation of the stimulus, which would have hurt the loonie in the market. As such, they were rushing to be early birds on the bear side of the market. 

CAD/USD 4-hours price chart

Figure 2: CAD/USD 4-hours price chart

Despite the sudden jump on Wednesday, the loonie remains vulnerable to the greenback’s assault. The RSI in figure 2 tells in terms of the CAD’s ability to hold yesterday’s gains. A sharp turn of the RSI towards the mid-point indicates the buying pressure against the CAD/USD is giving just hours after the currency’s best rally in almost a year. In a nutshell, one cannot speak with authority regarding the pair’s direction, at least in the short run.

China and Australia at each other’s throats

The Australian government has vetoed the participation of Victoria in the China-led Belt and Road Initiative (BRI). This is the latest episode in a series of spats between the two countries, which is part of the bigger super-power struggle between China and the US. Beijing feels the withdrawal of Victoria, an Australian province, is a provocation.

Forex traders hate such tensions, and they are registering their displeasure in the market. For the past two weeks, the Chinese yuan has been chipping away at the US dollar on the back of strong economic performance. However, China’s diplomatic upheaval with Australia seems to be undoing the progress.  

USD/CNY 4-hour price chart

Figure 3: USD/CNY 4-hour price chart

The USD/CNY has had a good run so far in the Chinese yuan (CNY’s) favor, but the decline seems to have run out of rope. At the time of writing, the pair was up 0.01% to 6.4878. The RSI and MACD in figure 3 above indicate the buying pressure could be just getting started. 

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