Fundamental Forecast for Canadian Dollar: Neutral
USD/CAD trades near the monthly-high (1.2902) as the Federal Open Market Committee (FOMC) appears to be on course to further normalize monetary policy in 2018, but a marked pickup in Canada’s Consumer Price Index (CPI) may rattle the near-term resilience in the exchange rate as it puts pressure on the Bank of Canada (BoC) to follow a similar path to its U.S. counterpart.
Fresh forecasts from Fed officials suggest the central bank will stay on its current course of delivering three rate-hikes per year, and the hiking-cycle may prop up USD/CAD over the near-term especially as the BoC endorses a wait-and-see approach for monetary policy.
With Fed Fund Futures showing budding expectations for a March rate-hike, the pair stands at risk for a more meaningful recovery going into the end of 2017, but key data prints coming out of Canada may spark a bearish reaction in the dollar-loonie exchange rate as the headline reading for inflation is expected to climb to an annualized 2.0% from 1.4% in October.
The threat for above-target inflation may heighten the appeal of the Canadian dollar its raises the risk of seeing Governor Stephen Poloz and Co. adopt a more hawkish tone in 2018, and the central bank may increase its efforts to prepare Canadian households and businesses for higher borrowing-costs as officials note ‘higher interest rates will likely be required over time.’ On the other hand, a below-forecast CPI print may fuel the near-term resilience in USD/CAD as it raises the BoC’s scope to retain the current policy for the foreseeable future. Interested in having a broader discussion on current market themes?
USD/CAD Daily Chart
Near-term outlook for USD/CAD remains clouded with mixed signals as the pair marks a failed attempt to test the monthly-high (1.2902), with the pair stuck in a narrow range as the 1.2620 (50% retracement) region offers support. Keep in mind, the Relative Strength Index (RSI) highlights a similar dynamic as it struggles to push back into overbought territory, but the broader outlook remains supportive as the oscillator preserves the bullish formation carried over from August.
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