Canadian dollar drifting

The Canadian dollar continues to drift this week. In the North American session, USD/CAD is trading at 1.2061, down 0.08% on the day.

Will the Canadian dollar break below 1.20?

The Canadian dollar enjoyed another strong month in May, with gains of 1.87%. The “eye on the prize” is the 1.20 line, which has psychological significance. This major support level has held since May of 2015, but this line could break shortly, as the Canadian dollar continues to look strong. USD/CAD has plunged 5.3% since April 1, and the pair came within a whisker of the 1.20 line, touching a low of 1.2007.

Canada’s economy continued to forge ahead in the first quarter of the year. GDP for March came in at a solid 1.1%, above the forecast of 1.0% and above the February reading of 0.4%. The Q1 GDP report showed a 5.6% gain, down from the stellar 9.6% gain in Q4. This was shy of the consensus of 6.7%. The Canadian dollar responded with gains after the GDP release and came close to the 1.20 line, but was unable to hold onto these gains.

The economic recovery has been fuelled by a resurgence in exports and the strong housing market. Interestingly, the recovery has forged ahead largely without the support of consumer spending, a key driver of economic growth. Strict lockdowns have put a crimp in consumer spending, but pent-up demand is expected to translate into a surge in consumer spending later in the year.

The BoC holds its policy meeting next week. The bank has signalled that its key interest rate could rise above the current 0.25% in late 2022. If the BoC continues to drum a hawkish message, it should translate into more gains for the pesky Canadian dollar.

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       USD/CAD Technical

• USD/CAD faces resistance at 1.2137 and 1.2195
• The pair continues to test support at 1.2025. Below, there is support at 1.1971

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/

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