Forex Market: USD/CAD hits fresh 4-1/2-year highs on diverging central banks policies

The loonie, as the Canadian dollar is best known, declined to the weakest level since July 2009 against its US counterpart, as the US Federal Reserve signaled yesterday it may increase borrowing costs by mid-2015 and reduced monetary stimulus, while Bank of Canada Governor Stephen Poloz said the central bank may cut interest rates should the economy weaken.

USD/CAD hit a session high at 1.1279 at 11:15 GMT, the strongest since July 2009, after which the pair consolidated at 1.1264, adding 0.22% for the day. Support was likely to be received at March 19th low, 1.1122, while resistance was to be encountered at July 15th 2009 high, 1.1347.

The Federal Reserve revised its forecasts yesterday, showing more policy makers predicted the main interest rate, now close to zero, would increase at least to 1% by the end of next year and 2.25% by the end of 2016, higher than previously forecast.

The stance of the central bank was seen as slightly more hawkish than investors expected, boosting demand for the US dollar.

Policy makers remained on track with Fed’s previous decisions to reduce the central bank’s unprecedented Quantitative Easing program at each successive FOMC meeting and trimmed the bond-buying program by another $10 billion to $55 billion per month. The monetary easing program is expected to be brought to an end this fall.

Moreover, Federal Reserve Chair Janet Yellen, who presided her first FOMC meeting, said at a following conference that the first increase in borrowing costs should come “around six months or that type of thing” after the end of the stimulus program. Policy makers also scrapped the unemployment-rate threshold for considering when to raise interest rates and said it will look for a wider range of data.

“We’re looking for the dollar to remain supported,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London, cited by Bloomberg. “We’d focus that very much against the commodity-related currencies.

Meanwhile, loonie’s demand continued to be pressured after central bank’s Governor Stephen Poloz said on March 18 that BoC may cut interest rates should the economy falter. In his speech before the Halifax Chamber of Commerce, Poloz blamed inclement weather for the weaker-than-expected economic growth, warning that GDP in the first quarter may be “on the soft side”.

Canadian wholesale sales increased in January as higher proceedings from computer and communications equipment offset declines in motor vehicles and parts, Statistics Canada reported yesterday. Wholesale sales rose 0.8% to 50.0 billion Canadian dollars in January, short of analysts’ expectations of a 1% increase and after a 1.3% slump in the previous month.

On March 18, data showed the value of securities transactions between Canadian residents and foreign investors unexpectedly declined in January. The corresponding figure reached 1.09 billion CAD in January, while preliminary estimates pointed to a figure of 3.24 billion CAD.