USD/CAD: Canadian dollar falls before the BOC interest rate decision

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The USD/CAD pair rose ahead of the Bank of Canada’s interest rate decision.
Analysts expect the Bank to leave interest rates and QE unchanged.
This is also in response to falling crude oil prices.

The USD/CAD price has risen 0.55% as traders react to low crude oil prices ahead of the Bank of Canada’s (BOC) interest rate decision. The pair is trading at 1.3250, the highest level since October 15th.

USD/CAD rises ahead of the BOC’s decision
Crude oil price slides

Canada is the fourth largest producer of crude oil after the United States, Saudi Arabia and Russia. The country produces more than 5.9 million barrels a day. It consumes about 2.2 million barrels daily and exports the rest. The sector also directly and indirectly employs millions of people.

These factors make the Canadian dollar very sensitive to world crude oil prices. And today the oil price is in a strong downward trend. West Texas Intermediate (WTI) fell by 4.65% to 37.75 dollars. On the other hand, Brent, the international benchmark, has fallen by 3.75% to $40. Overall, the price has fallen by more than ~10% in the last two weeks.

Crude oil prices of Brent and WTI

This decrease is due to the increasing number of Covid-19 cases around the world. In the United States, the number of infections has increased by more than 500k in the past week. Similarly, the number has increased in other countries, including Canada, Norway, Germany and France.

As a result, demand will continue to decline as countries introduce a further round of restrictions. Air transport, which is a major consumer of oil, will also take time to recover as countries such as Norway have begun to impose quarantine measures. At the same time, OPEC and other producers have not yet signaled whether they will restrict their production.

Interest rate decision of the Bank of Canada

The USD/CAD price rises a few hours before the Bank of Canada’s (BOC) October interest rate decision. Analysts surveyed by Reuters and Bloomberg expect the bank to leave interest rates unchanged at 0.25%. They also expect that the Governor will signal that interest rates will remain at current levels for a longer period of time as he has ruled out negative interest rates.

The analysts also expect the bank to commit to more quantitative easing to support the economy. It will do so by purchasing more than $3.8 billion worth of government bonds each week.

These measures have helped the Canadian economy recover faster than its competitors. While, for example, the US economy contracted by more than 30% in the second quarter, Canada only weakened by 13%.

However, the situation is changing with the fall in oil prices. Moody’s and UBS Bank have also warned that the real estate market will experience falling prices in the near future.

Technical outlook USD/CAD
USD/CAD technical table

The four-hour chart shows that the USD/CAD price has risen from a low of 1.3100 to the current high of 1.3260. The price has also moved above the October high of 1.3245. It has also risen above the 50-day and 25-day exponential moving averages. Note that it also moves along the second resistance level of the standard pivot. Therefore I expect the price to fall back to the first resistance at 1.3190 after the BOC decision.

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