USDCAD set for its most volatile week of 2024

• CAD has fallen against most G10 peers so far in Q2
   
• CAD weakened by expectations for Bank of Canada rate cuts
   
• Falling oil prices heap more downward pressure on “loonie”
   
• Bloomberg model: 75% chance of 1.3533 to 1.3812 one-week trading range
   
• USDCAD traders will be closely monitoring Bank of Canada decision today

The Canadian Dollar is going through a rough patch.

It has weakened against all of its G10 peers (except the Japanese Yen) so far in Q2 2024.

It has extended that downcast performance into this month (June 2024), also losing against all of its G10 peers (except the Norwegian Krone) on a month-to-date basis.

Why is the Canadian Dollar falling?

CAD a.k.a. the “loonie” has been on a slippery slope due to two key reasons:

• Bank of Canada rate cuts: Canada’s central bank is widely expected (83% chance) to cut interest rates at its meeting today (Wednesday, June 5th).
  
  A country’s currency tends to weaken when it has lower interest rates compared to its peers.
  
  For all of 2024, markets are forecasting a 62% chance that Canada will see 3 rate cuts (75 basis points in total) for all of 2024.
  
  Compare that with the US, where markets predict a 75% chance of just TWO rate cuts (50 basis points in total) for all of 2024.
  
  Hence, given the greater prospects of rate cuts in Canada vs. the US, no surprise that the Canadian dollar is notably weaker against the US dollar (higher USDCAD).

• Weaker oil prices: The "loonie" is also historically correlated with oil prices.
  
  When oil prices go up, CAD tends to strengthen, and vice versa.

Hence, with oil prices faltering since April, that has contributed to CAD’s weakness as well.

From a technical perspective:

Though finding support at its 50-day simple moving average (SMA) so far today, USDCAD has been squeezing into a tighter “triangle” formation since mid-April.

Note how after posting a 5-month peak (highest since November 2023), USDCAD has only managed lower highs since.

To the downside, it's notable that the 1.3600 psychological level has provided strong support more recently.

For the next one-week period, there’s a projected 75% chance that USDCAD will trade within the 1.3533 to 1.3812 range, according to Bloomberg’s FX forecast model.

Potential scenarios

• Higher USDCAD: If the Bank of Canada opens the door to even more rate cuts for the rest of 2024, that should lead to a weaker CAD.
  
  USDCAD may then break above the downward trendline that commenced from the mid-April peak.

• Lower USDCAD: If the Bank of Canada shocks markets and refrains from lowering its benchmark rate today, that could result in a knee-jerk drop for USDCAD, potentially testing the 1.3600 psychological support line once more.

Considering this pivotal rate decision, no surprise that markets are already anticipating what could be the most-volatile one-week period for USDCAD so far in 2024.