10.06.202213:35 Forex Analysis & Reviews: USD/CAD: Loonie yields to greenback amid hawkish Fed

Interesting events are taking place around the USD/CAD pair. The Canadian dollar has been steadily strengthening for almost four weeks amid the strengthening of the oil market and the hawkish mood of the Bank of Canada. Since May 13, the loonie has risen by 500 points, reaching a two-month low (1.2516) on June 8. However, USD/CAD bears could not enter the area of the 24th figure. The day before yesterday, the pair turned 180 degrees and soared sharply, rising by more than 200 points in two days.

This price spurt is primarily due to the strengthening of the US currency. The Canadian dollar could not hold back the onslaught of the dollar bulls, but there was no clear informational reason for the weakening of the loonie. Obviously, the greenback plays the role of the first fiddle in the USD/CAD pair, so the further prospects of the loonie depend on the behavior of the US currency.

Note that following the results of the June meeting, the Canadian regulator raised the interest rate by 50 basis points, thereby realizing the most expected scenario. But at the same time, the Bank of Canada maintained a hawkish attitude and announced further tightening of monetary policy. The rhetoric of the head of the Canadian central bank allowed the USD/CAD bears to increase pressure on the pair. In the text of the accompanying statement, the regulator indicated that in the second quarter, the country's economic growth "will be quite strong," given the steady consumer spending, as well as the strengthening of exports. Analyzing the results of the June meeting, most experts came to the conclusion that in July the regulator will also raise the interest rate by 50 basis points.

On these rails of a fundamental nature, the loonie dropped to the bottom of the 25th figure. It should be noted here that the Canadian dollar is a worthy competitor to the US currency: the loonie often rose in price even against the background of a general strengthening of the greenback. In my opinion, the main reason for this stress resistance of the Canadian lies in the actions of the Bank of Canada.

Recall that last year the Canadian regulator showed a combative character, outstripping even the US Federal Reserve in this regard. Firstly, the BOC began to reduce QE in the first half of last year (becoming the first of the G7 central banks to begin gradually curtailing anti-crisis measures). In October 2021, the regulator announced the early completion of the incentive program. As you know, the Fed members made a similar decision on the early curtailment of QE only a month later—at the November meeting. Then the Federal Reserve and the Canadian regulator, so to speak, went level, systematically tightening their rhetoric and monetary policy parameters. Central banks raised the interest rate in March and declared further steps in this direction. Therefore, for a long time, the loonie did not succumb to the onslaught of dollar bulls, using any weakening of the greenback in his favor.

To date, the situation has changed somewhat. There has been increasing market speculation that the Fed will raise interest rates in 50-point increments at every meeting this year. Nearly 70% of economists surveyed by Reuters said the Fed would pause rate hikes in the first or even second quarter of next year. Some representatives of the Fed indirectly confirm these assumptions. In particular, Fed Board member Christopher Waller said earlier this week that he supports raising interest rates by 50 basis points "in the next few meetings." Fed Vice Chair Lael Brainard also said that the regulator is not going to stop there, as "the number one priority is to reduce inflation." St. Louis Fed President James Bullard (who also has the right to vote this year) recently repeated his thesis, pointing out that the Fed needs several 50-point rate hikes.

The Bank of Canada is currently unable to demonstrate such decisiveness: the event horizon here is limited to the July meeting, at which the central bank is likely to raise rates by 50 points. However, future prospects are still rather vague.

Thus, the USD/CAD pair was able to turn 180 degrees mainly due to the strengthening of the hawkish mood regarding the Fed's next steps. The Canadian regulator has already said its word, while the American central bank still retains a certain intrigue. The US dollar retains the potential for its further strengthening.

From a technical point of view, the USD/CAD pair is currently testing the middle line of the Bollinger Bands indicator on the D1 timeframe (1.2720). Most likely, traders will overcome this price barrier, given the strength of the upward movement. The next upward target is 1.2790, which is the upper boundary of the Kumo cloud on the same timeframe. Overcoming this target will open the way for USD/CAD buyers to the area of the 28th figure.