In Monday’s Asian session, the USD/CAD pair maintained a narrow range slightly above the critical support level of 1.3650. The Canadian dollar, commonly referred to as the Loonie, grappled for direction amidst a subdued trading atmosphere, with the US Dollar finding stability amid the Memorial Day holiday in the United States.
The Loonie experienced significant selling pressure on Friday, primarily driven by weakness in the US Dollar. Despite market expectations for the Federal Reserve (Fed) to maintain interest rates within the range of 5.25% to 5.50% during its September meeting, the US Dollar Index (DXY) plummeted to 104.70. This decline coincided with a surge in the probability, as per the CME FedWatch tool, of the Fed keeping interest rates unchanged. Traders now assess a slightly over 50% chance of a steady interest rate decision, up from 38% the previous week. This shift in sentiment towards a stable monetary policy was reinforced by the release of a robust preliminary US Purchasing Managers Index (PMI) report for May.
On the other hand, the outlook for the Canadian Dollar remains uncertain, with weak domestic spending raising the possibility of a rate cut by the Bank of Canada (BoC) in its forthcoming monetary policy meeting on June 5th. Statistics Canada’s recent data revealed a 0.2% decline in monthly Retail Sales for March, marking the third consecutive month of contraction. This downturn, sharper than the 0.1% decline recorded in February, underscores the challenges faced by households amid higher interest rates imposed by the BoC. The persistently weak household spending, coupled with easing price pressures, emphasizes the necessity for the BoC to consider a return to policy normalization.
