Favorable conditions for the Canadian economy that were created by the super-cycle in the commodity markets and the normalization of BoC’s monetary policy are contributing to the USDCAD decline. Does the Bank of Canada like it? Let us discuss the Forex outlook and make up a trading plan
Quarterly Canadian dollar fundamental forecast
The Fed’s intention to allow the US economy to overheat has become a real revolution in monetary policy. Those central banks that did not follow the Fed’s example are beginning to face the problem of the growing exchange rate of the national currency. The Bank of Canada is a typical example. It operates in the old-fashioned way, which has led to the fastest strengthening of the loonie among the G10 in the last three months.
Dynamics of G10 currencies
Source: Bloomberg.
Loonie bulls are not confused by the fact that Tiff Macklem, seeking to discourage USDCAD bears, claims that the BoC is closely monitoring the Canadian dollar, as its further strengthening will jeopardize Macklem’s export forecasts. As well as Macklem’s statement that the BoC will not rush to raise rates. The derivatives market gives a 50% chance that the overnight rate will rise by 25 bps in 2022 and is 100% sure that it will rise by 75 bps and 125 bps over the next two and three years, respectively.
Expectations for the continuation of the monetary normalization are so high that Canadian bond yield is the highest among the G10. This, along with the favorable conditions for Canada created by the commodity market super-cycle, contributes to the USDCAD decline.
The Fed’s revolution aside, the BoC clearly has every reason for the monetary restriction. The labor market lacks just 500,000 jobs to reach pre-recession levels, manufactured goods’ prices are growing at the fastest pace in 40 years, while the vaccination acceleration (in Canada, about 18.4 million people, or 49% of the adult population, have received at least one injection) and large-scale fiscal stimulus both domestically and in the United States suggest an impending economic boom. The local CCI hit an all-time high of 64.6, with 45% of Canadians believing the economy will get stronger in the next six months. This is the highest figure since 2009.
Dynamics of Canada’s consumer confidence index
Source: Bloomberg.
Politicians, including central bank officials, should be concerned about all industries, not just the mining-related sectors. Some may accept higher rates thanks to the super-cycle in the commodity market, while others may not. In this regard, the BoC’s verbal interventions look logical, but the regulator is unlikely to interfere directly in the Forex. Tiff Macklem made it clear that he would be worried about the Loonie’s strengthening without fundamental reasons, and there are still plenty of them.
Quarterly USDCAD trading plan
In my opinion, the growth of global demand for oil and other raw materials will contribute to higher prices and the continuation of BoC’s monetary policy normalization. At the same time, the widening of the gap between Canadian and US bonds will allow USDCAD to continue its decline in the direction of 1.18. Stick to the previous selling strategies.
Price chart of USDCAD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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