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Canadian dollar price forecast 14 July 2021 | USDCAD and EURCAD Fundamental analysis

Even though the Bank of Canada’s rate of monetary policy normalization is faster than that of the Fed, the USDCAD price is growing. How have the pair been influenced by the fact that the Fed has accelerated and can do it again? Let us discuss the Forex outlook and make up a trading plan for USDCAD and EURCAD

Monthly Canadian dollar fundamental forecast

Looking at how well things are going in Canada, one can only wonder why the loonie is not building up its advantage against the major world currencies? The Canadian dollar continues to lead the G10 performance race, but has weakened by 2.7% against the USD over the past month. The gap is rapidly closing, which looks odd against the backdrop of a bullish oil market, record-high commodity prices, business sentiment and consumer confidence in Canada.

The territorial factor and close ties with the United States allow Ottawa to benefit from the rapid growth of the US economy. The OECD estimates that Joe Biden’s $1.9 trillion fiscal stimulus will expand Canada’s GDP by 0.5 pps over 12 months. US imports from Canada in January-May increased by 29% compared to 2020 and by 5% compared to 2019. The Canadian market is likely to fully recover from the recession in the third quarter of this year, which, against the backdrop of rapidly growing inflation, allows the BoC to normalize monetary policy.

Inflation dynamics in Canada

Source: Bloomberg.

At the July 14 meeting, Tiff Macklem and his colleagues are likely to scale back QE asset purchases from CA$3 trillion to CA$2 trillion per week. Until the end of 2021, Bloomberg experts expect further withdrawal of monetary stimulus in the form of a fall in QE program volumes to CA$1 trillion per week. Since the start of the pandemic, the Bank of Canada has bought up CA$320 billion in sovereign debt. A slowdown in its balance sheet growth should support the loonie.

Dynamics of asset purchases by the Bank of Canada

Source: Bloomberg.

The USDCAD rally looks surprising due to the fact that the derivatives market expecting four overnight rate hikes by the end of 2022 and only two acts of monetary restriction by the Fed over the same period. The speed of monetary policy normalization in Ottawa is clearly higher than in Washington. However, the gap between loonie and greenback is rapidly shrinking. What is the reason?

To my mind, the USDCAD bulls are trading the factor of surprise. Unlike the Bank of Canada, which has already scaled back QE twice in October and April, the Fed’s withdrawal from its wait-and-see approach came as a real surprise. The massive exits of short US dollar trades led to a USDCAD rise.

Monthly USDCAD and EURCAD trading plan

In my opinion, a reversal of the long-term downtrend will be possible if the Fed starts to act very aggressively and (or) the BoC, for no reason at all, begins to delay the start of monetary policy normalization. The chances of the first option look preferable. I expect USDCAD to consolidate in the range of 1.23-1.275 and stand for sales on growth or purchases on a price decline. You would better trade divergence in monetary policy entering EURCAD shorts with the target at 1.45. The inability of the bulls to consolidate the price above 1.48 is a sign of their weakness and good news for loonie buyers.


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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