USD/CAD Rate Risks Larger Rebound As Bearish Sequence Snaps

CANADIAN DOLLAR TALKING POINTS

The recent selloff in USD/CAD appears to have stalled as representatives from Canada & the U.S. gear up for negotiations, and current price action warns of a larger recovery as the exchange rate snaps the series of lower highs & lows carried over from the previous week.

USD/CAD Rate Risks Larger Rebound as Bearish Sequence Snaps

The limited reaction to the U.S. Gross Domestic Product (GDP) report may keep USD/CAD in a narrow range as attention turns to the talks surrounding the North American Free Trade Agreement (NAFTA), but the 4.2% expansion in the growth rate should keep the Federal Reserve on track to further normalize monetary policy especially as the core Personal Consumption Expenditure (PCE), the central bank’s preferred gauge for inflation, sits at 2.0%.

With the Federal Open Market Committee (FOMC) largely achieving its dual mandate for full-employment and price stability, Chairman Jerome Powell & Co. may ultimately prepare U.S. households and businesses for four rate-hikes in 2018 as the recent developments point to a more robust economy.

However, market participants may pay increased attention to the updated Summary of Economic Projections (SEP) as the central bank pledges to alter the forward-guidance for monetary policy, and ongoing projections for a neutral Fed Funds rate of 2.75% to 3.00% may produce headwinds for the greenback as it dampens bets for an extended hiking-cycle.

Until then, the adjustment in U.S. trade policy may continue to sway the near-term outlook for USD/CAD as President Donald Trump tweets that the new agreements will be a ‘big hit,’ and the ongoing transition may produce increased volatility in the exchange rate as Canada’s Prime Minister, Justin Trudeau, pledges to strike ‘a modern and progressive agreement that is in line with our values and our ambitions and that will benefit not only Canadian businesses but all Canadians.’