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USD/CAD Bounces off Lows as US Dollar Strengthens

USD/CAD gains support by the US Dollar rally and narrowing trade deficit. The Canadian dollar slipped to 3-year lows with rising virus cases and job loss.

USD/CAD at Resistance Level at 1.2720

The Canadian dollar moved to its lowest levels at 1.2630 on Wednesday, to levels not seen since April 2018. The USD/CAD currency rate is trading within a range between 1.26400 and 1.2740 for the past three days. The US dollar rallied against major currencies, which has brought a slight increase in the Canadian dollar.

The resistance level 1.2780 is strong, and USD/CAD has not moved past this level last week. If the USD/CAD moves past this resistance, it may move further up to the next resistance at 1.29 and 1.30 levels.

The USD/CAD has support at 1.2650, and if this support weakens, the currency pair may move towards 1.2625.

USD/CAD Bounces off 3-Year Lows

Trade deficit Narrows to $3.3 Billion

The trade deficit in Canada is at $3.3 billion in November, while it was $3.7 billion in October. Exports have increased, and imports have decreased, but still lower than the pre-covid levels.

International trade in Canada has come down sharply. The trade deficit is at historically high levels, with export and imports decreasing, which is blamed on the strong Canadian dollar. It has gained 4% against the US recently.

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In November, exports were just 0.5%, while imports were at 0.3%, the lowest since May, according to reports from Statistics Canada. The trade deficit has come down to Can$3.3 billion in November with demand for gold growing, while in October, it was at Can$3.7 billion. Export of copper and iron ores have also improved. But the import of motor vehicles and lumber has come down.

Trade with other countries other than the US in November has been good. It was up 2.1%, but trade with the US has come down to its lowest level since June at 2.2%, as activities are curbed,  says a survey.

The service sector has declined in Canada. Foodservice industry and the accommodation sector have lost 56,700 jobs. Hair salons and laundry services have been affected by the restrictions. However, the manufacturing industry has improved.

Unemployment Rate Increases

Canada’s unemployment rate has increased from 8.5% in November to 8.6% in December, which does not reflect well on the economic situation. In December, about 63,000 have lost their jobs. Restrictions and lockdown to curb the pandemic have increased, leading to a loss in jobs. After April, the decline has been worst in December. The domestic economy is weakening with the coronavirus sweeping across the country.

The service sector in Canada was affected during the pandemic, and jobs have declined in this sector. Additional restrictions are hitting the economy, and job opportunities are becoming scarce.

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The Business Outlook Survey is expected on Monday from the Bank of Canada. Month-on-month data on Manufacturing Sales data and Wholesales Sales is expected on Tuesday. However, special importance will be placed on the Monetary Policy Report and the Rate Statement from the Bank of China on Wednesday. Monetary policy is expected to ease further.

Corona Restrictions Increase

Corona cases have resurged with the new strain of the virus emerging again. Hospitals are filling fast without space, which prolongs restrictions on various parts of the economy. When restrictions were removed in summer, the economy saw a fast rebound, and experts await a similar pattern after the current resurgence in virus cases subside.

Though vaccination is deployed, the speed at which they proceed is not sufficient, say health analysts. The Democrat-led government may bring in more pandemic-related stimulus package, and the new has raised the US bond yields. The US share market rallied with news of pandemic relief packages.

The Canadian bond yields were higher, with the 10-year bond yields up 2.7 basis points, its highest since 8 December, and an increase of 0.785%.

The province of Quebec may extend the lockdown to 8 February to bring down the virus resurgence.

Crude Rally to Benefit Canadian Dollar

Brent has rallied past $55 after Saudi Arabia made deep cuts on crude production after the OPEC+ meeting. The rally in the oil sector will strengthen the Canadian dollar, as it a commodity-related currency.

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The oil industry in Canada is expected to recover in 2021 after the pandemic upheaval caused a large downturn in 2020. Total investments in the oil sector may increase 12% from last year, say experts.

US Dollar Just Above Psychological Mark at 90.00

The US Dollar recovered above resistance at 89.90 and crossed the psychological 90.00 marks to close at 90.068 on Friday, 8 January 2021. The rally has been good for the Canadian dollar.

The US Dollar dropped 0.9% in 2021. It fell almost 7% in 2020. The greenback hit 89.16, falling lower than 89.23, which is the bottom level, touched on 17 April 2018.

The US dollar, which touched 2018 levels, bounced off these levels after the dollar rallied. The greenback’s rally was accounted to the US Capitol protest by President Donald Trump’s followers. Investors are booking profits, and this is moving the safe-haven.

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