Ben Bernanke sent the US dollar plunging by surprising the markets and not tapering bond buys. This was a positive surprise for stocks and all the other currencies.
The Canadian dollar also rallied, extending earlier gains and reaching a three month high against the greenback. However, in comparison to other currencies, the reaction was relatively muted. Why? It comes down to the nature of the reasons behind the move.
The chart shows that USD/CAD already broke below uptrend support a few days earlier. IT now broke below the 1.0245 support line which was the trough of July.
However, it stalled around 1.02 and didn’t tackle important support at 1.0180 – the bottom of June. If it does make it below this line, 1.0125 and 1.01 will provide further support on the crowded road to parity.
Above, 1.0285 now works as minor resistance above 1.0245, with 1.0360 already serving as tougher resistance.
Why a weak reaction?
Deciding not to taper means an ongoing high pace of USD printing, which also pushes oil prices higher. As Canada is an exporter of oil, shouldn’t the loonie rally?
Not so fast: the Canadian economy depends on demand from its southern neighbor more than on oil, at least for now. The Fed decided not to taper as it requires further evidence to a sustainable recovery.
Ben Bernanke also expressed worries about the situation and mentioned that the unemployment rate doesn’t really show the real picture of the labor market.
With a not-so-positive outlook for the US economy, also the Canadian economy has some limits, and so does the Canadian dollar.
A more upbeat Federal Reserve would have sent the C$ higher. So, the despite the big drop in USD/CAD (or big rise in CAD/USD), the road to parity relative long, and full of bumps.
For more, see the Canadian dollar forecast.