USD / CAD struggles to break through 1.30 area

The USD / CAD currency pair is almost stable for the year. After trading as low as 1.20, it is back to last January’s levels. What will drive the price action in 2022?

One of the more interesting markets to trade in 2021 was the USD / CAD. The two currencies that make up this pair were extremely volatile, and for a while they even moved correlatively.

First, the strength of the US dollar is the cause. The greenback appreciated against its peers in 2021. But the Canadian dollar was just as strong at certain times of the year. Because it is highly dependent on the price of oil, the Canadian dollar may diverge from general market sentiment.

Interpretation of the technical image

To fully understand the significance of the 1.30 level, we have to go back to 2019. This is when the exchange rate formed a bullish flag which found support above the 1.30 level.

After breaking higher, price action remained bullish and hit 1.46, thanks to financial markets digesting the impact of the COVID-19 pandemic. But as central banks intervened, and in particular the Federal Reserve, the price of oil rallied, and so did the Canadian dollar.

Moving lower, the USD / CAD found support in the 1.30 pivot area again, but the support failed to hold. On a clear break down, it fell to 1.2, before rebounding.

Omicron could have an impact on Canadian GDP

Although the Canadian population is highly vaccinated, the new variant, the Omicron, poses a risk to Canadian GDP. Despite the fact that employment jumped 154,000 in November, productivity fell for the fifth consecutive quarter. From this point of view, the Canadian dollar is likely to fall further; thus, the USD / CAD bias is bullish until 2021.

Federal Reserve and Bank of Canada policies diverge

Finally, the two central banks have divergent monetary policies. The Bank of Canada reduced its asset purchases faster than the Fed given inflation in Canada, reaching 4.7%, the highest in 30 years. As a result, markets are now anticipating five rate hikes next year, but the risk is that inflation will drop in 2022 and the Bank of Canada will tighten less than the market is forecasting.

As for the Federal Reserve, the opposite has happened. Instead, he announced the doubling of his reduction schedule, signaling a faster tightening. As such, it could rise before the Bank of Canada and lead to further rate hikes in 2022.

Once again, the divergence in monetary policies supports a move above 1.30. As such, expect the currency pair to trigger stops on a daily close above the level.

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