USD/CAD To Eye Fresh May Highs On Hawkish Fed Rhetoric, Dovish BoC

Fundamental Forecast for CAD: Neutral

The near-term advance in USD/CAD may gather pace in the week ahead should the Bank of Canada (BoC) endorse a dovish outlook for monetary policy, while Federal Reserve officials show a greater willingness to implement higher borrowing-costs over the coming months.

The BoC is widely anticipated to retain its current policy at the May 25 interest- rate decision, but Governor Stephen Poloz and Co. may adopt a more cautious outlook for the region as Finance Minister William Morneau sees the Alberta fire having a ‘modest’ impact on economic activity. Despite the stickiness in Canada’s Consumer Price Index (CPI), the slowdown in job growth accompanied by the weakening outlook for global growth may prolong the rebalancing of the real economy, and the loonie stands at risk of facing near-term headwinds should the BoC adopt a more cautious tone this time around.

At the same time, fresh comments from St. Louis Fed President James Bullard, San Francisco Fed President John Williams, Philadelphia Fed President Patrick Harker, Minneapolis Fed President Neel Kashkari, Dallas Fed President Robert Kaplan, Fed Governor Jerome Powell and Fed Chair Janet Yellen may fuel a further advance in USD/CAD as the central bank appears to be on course to further normalize monetary policy over the coming months. Even though the Federal Open Market Committee (FOMC) remains ‘data-dependent,’ the central bank may continue to prepare households and businesses for higher borrowing-costs especially as the U.S. economy approaches ‘full-employment.’