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USD/CAD forecast for 11.05.2020

May 11, 2020

May 11, 2020

Loonie believes in friendshipDmitri Demidenko

USD/CAD is down as loonie is supported by its friends, oil and the

S&P 500

When the WTI futures were down below zero, the Canadian dollar seemed to achieve something impossible. It remained stable, which is nonsense for the currency of an oil-exporting county. Nonetheless, a weaker correlation between the [USD/CAD][1] and the WTI has natural reasons. The oil price dropped so deep that all the negative resulted from the huge decline in the global demand and the increase of the supply due to the war between Russia and Saudi Arabia should have been priced in the loonie’s rate. That is why I [recommended][2] selling the [USD/CAD][1] on the rise. At that time, the pair was trading above 1.42.

Dynamics of correlation between CAD and oil

![LiteForex: USD/CAD forecast for 11.05.2020][3]

Source: Bloomberg

Although the loonie is stable, the investors are rather bearish on the CAD. According to the Bank of Nova Scotia, the major problems of the Canadian dollar result not from the oil price changes, but the reaction of Canada’s economy to the pandemic. Rosenberg Research & Associates says the loonie may drop from the current 71 cents to 60 cents amid the capital outflow from Canada’s stock market. Currently, only Germany and Canada have the highest credit rating among the G7 countries. However, the huge fiscal and monetary stimulus will result in the growth of the public debt (the current debt-to-GDP ratio is 89%), the downgrading of the credit rating, and the outflow of the foreign capital from Canada’s markets. In fact, Canada’s government and central bank have spent quite a lot to fight with the economic fallout of the pandemic. For example, a sharp cut of the interest rate and the launch of QE worth CA$260 billion for the first time. Therefore, the BoC balance sheet started expanding.

Dynamics of BoC balance sheet

![LiteForex: USD/CAD forecast for 11.05.2020][4]

Source: Bloomberg

I must admit the Canadian domestic data are getting weaker. The unemployment rate was up from 7.8% to 13% in April, which is very close to its all-time high of 13.1% recorded in 1982. Over the past two months, the economy has lost about 3 million jobs, which is equal to the growth featured over the past 15 years. About a third of the people who make up the labor force are either unemployed or their resources are not used.

Canada’s exports in March featured the worst drop since 2009 (-4.7%) amid the oil price crash and the decline on foreign demand due to ti the pandemic; imports were down by 3.5% Y-o-Y, which boosted Canada’s foreign trade deficit from CA$894 million to CA$1.4 billion. The trade volume has declined to the lowest level since 2018.

Dynamics of Canada’s exports

![LiteForex: USD/CAD forecast for 11.05.2020][5]

Source: Bloomberg

Of course, domestic data are weak in Canada, but the situation is the same in other countries. For example, the U.S. economic situation is not better than that in Canada. The derivatives market bets on the Fed’s rate cut below zero by June 2021, and the current economic downturn is often compared to the Great Depression of the 1930s. The U.S. monetary and fiscal stimulus is not less than in Canada, so the U.S. credit rating is also can be downgraded, and the risk is not lower than that in Canada.

The loonie is supported by oil and the US stock indexes. If the S&P 500, Brent and WTI continue trading up, and the [USD/CAD][1] breaks through the support at 1.385, the pair should continue falling.

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Price chart of USDCAD in real time mode

![Loonie believes in friendship][8]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. my.liteforex.com/trading/chart?symbol=USDCAD&returnUrl=true
  2. www.liteforex.com/blog/analysts-opinions/oil-got-into-trouble/
  3. cdn.liteforex.com/cache/uploads/blog_post/fundamental_analysis/usdcad-wti-11-05-20.jpg?w=30&s=e930f5da454d10814aa6244a4329d00b
  4. cdn.liteforex.com/cache/uploads/blog_post/fundamental_analysis/balance-bank-canada-11-05-20.jpg?w=30&s=dd43e94e1024638585552704eb106ddd
  5. cdn.liteforex.com/cache/uploads/blog_post/fundamental_analysis/canadian-export-11-05-20.jpg?w=30&s=d8e95cee2380cc0630eff05359faf5b6
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  8. cdn.liteforex.com/cache/uploads/blog_post/fundamental_analysis/liteforex-blog-usdcad-11-05-20.jpg?q=75&w=1000&s=ad64fb38e1aefa5693d100a2828e97b8