Canada was the first G7 country to cut its key interest rate. Its economy shows more sensitivity to aggressive monetary restriction in 2022-2023 than its US counterpart. Let’s talk about this topic and make a trading plan for USDCAD.
Weekly Canadian dollar fundamental forecast
Buy the rumor, sell the fact. This principle helped correctly predict the USDCAD reaction to the start of monetary expansion in Canada. Before the June BoC meeting, the futures market gave such an outcome an 84% probability, with 11 out of 15 Wall Street Journal experts forecasting a rate cut. After the pair soared to 1.3735, the sell-off began, and the prices returned to the previous range. However, something in Tiff Macklem’s speech made markets believe in an imminent recovery of the uptrend.
The Bank of Canada became the first G7 central bank to ease monetary policy. After being held at 5% for 11 months, the overnight rate was cut to 4.75%. During 16 months to July 2023, it rose by 475 basis points, bringing inflation down from a peak of 8.1%. Consumer prices slowed to 2.7% in April. The BoC expects the CPI to fall to 2% by 2025 but does not intend to wait for that to happen.
Canada has joined Switzerland, Sweden, the eurozone, and Denmark to cut the overnight rate. Unsurprisingly, the loonie was one of the G10 currency outsiders in the second quarter.
Performance of G10 currencies in Q2
Source: Bloomberg.
Households and businesses in Canada are more sensitive to aggressive monetary tightening in 2022-2023, causing its economy to cool faster than the US economy. Unemployment has risen 1.1% since last April to 6.2%, the highest level since January 2022. First-quarter GDP growth was 1.7%, below the Bloomberg consensus estimate of 2.2%.
The Bank of Canada decided to begin a cycle of monetary expansion. Tiff Macklem’s dovish rhetoric was unexpected. The BoC governor pinpointed that the overnight rate could go even lower if inflation continues to slow. He does not believe that the BoC should act with the Fed in mind to prevent the loonie from weakening. This would require an increase in the central bank interest rate differential, which currently stands at 75 basis points.
USDCAD performance and US-Canada yield spread
Source: Bloomberg.
According to the Bank of Nova Scotia, Tiff Macklem sounded remarkably indifferent toward the Canadian dollar. His comments allowed Scotiabank to forecast more overnight rate cuts than previously expected. Citigroup expects lower borrowing costs at each subsequent BoC meeting, including the one in July.
According to the futures market, this month’s odds rose to 46% after the Canadian labor market data was released. A near-forecast job gain of 26.7K was accompanied by a rise in the unemployment rate to 6.2%. Against an impressive +272k Non-Farm Payrolls data in the US, this allowed USDCAD bulls to take the initiative.
Weekly USDCAD trading plan
Anchored US inflation and the FOMC lowering its forecast for the federal funds rate from three to one or two acts of monetary expansion may create buying opportunities for the USDCAD pair with the targets at 1.395 and 1.41.
Price chart of USDCAD in real time mode
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