USD/CAD tumbles to fresh one-month lows near 1.2600 ahead of BoC

• Canadian Q1 GDP below expectations, still BoC 50 bp rate hike expected.
• Loonie is among the top performers of the American session.
• USD/CAD breaks range and tumbles to fresh lows.

The USD/CAD broke below 1.2650 and fell to 1.2628, reaching a fresh monthly low. The pair resumed the downside despite the Canadian GDP reading coming below expectations and ahead of Wednesday’s Bank of Canada meeting.

The loonie rose across the board during the last hours as the GDP report did not affect rate hike expectations from the BoC. The Canadian economy, measured by the GDP, rose by 3.1% during the first quarter (annualized), below the 5.4% of market consensus. Analysts at RBC Economics explained growth was supported by “robust household consumption and business investment that offset a sizable decline in net trade. Consumption expenditure increased 3.4% from the prior quarter despite a soft start to the quarter in January”.

On Wednesday, the Bank of Canada is expected to announce a 50 bp rate hike. “A strong economy, booming jobs market, and elevated inflation argue for another ‘forceful’ 50bp hike. And the BoC is unlikely to stop there, with a red hot housing market and support from rising commodity prices suggesting it may be even more aggressive than the Fed this year”, said analysts at ING.

The USD/CAD is falling despite the recovery of the US dollar. The DXY is having the best day in almost two weeks as US yields move higher. A deterioration in market sentiment is also helping the greenback. The Dow Joines is falling by 0.78% and the Nasdaq drops by 0.71%.

If USD/CAD rises back above 1.2650 the loonie will likely lose momentum favoring a return to the 1.2685/1.2650 range. Below the daily low, attention would turn to 1.2600. Ahead of the BoC meeting, volatility is set to remain elevated.