Fundamental Forecast for Canadian Dollar: Neutral
The Canadian dollar rallied to a fresh yearly high in March as currency traders increased their appetite for risk, but the loonie may come under pressure next week should the Bank of Canada cast a weakened outlook for the region. Although the BoC is widely expected to keep the benchmark interest rate at 1.00%, the central bank may keep the door open to expand monetary policy further in an effort to combat the ongoing slack within the real economy.
Indeed, economic activity slowed during the last three-months of 2011, with the growth rate advancing an annualized 1.8% versus the 3.5% expansion in the third-quarter, and we may see the BoC curb its fundamental assessment as the region faces a threat for a ‘significant shock.’ Governor Mark Carney has warned about the record rise in household debt, arguing that falling home prices could have ‘a relatively large impact on consumption,’ and the central bank head may sound a bit more cautious this time around as policy makers see the debt-to-income ratio tracking higher in 2012. Nevertheless, Mr. Carney may talk up interest rate expectations in an effort to discourage private sector borrowing, but the central bank may have little choice but to maintain a wait-and-see approach for a prolonged period of time as the BoC aims to balance the risks surrounding the region. According to Credit Suisse overnight index swaps, market participants see the central bank keeping the interest rate on hold over the next 12-months, and we may see the loonie come under pressure next week should the central bank talk down interest rate expectations.
From a technical standpoint, the USDCAD may push lower ahead of the BoC rate decision as it fails to hold above the 78.6% Fibonacci retracement from the 2007 low to the 2009 high (0.9900), and the pair may continue to retrace the rebound from the previous year as it searches for support. However, we will be keeping a close eye on the relative strength index as it approaches oversold territory, and we may see a short-term correction in the exchange rate should the oscillator continue to come off of its recent lows. - DS