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Canadian Dollar Forecast: Hawkish BoC, Vaccine Divergence to Underpin CAD

Canadian Dollar Forecast: Hawkish BoC, Vaccine Divergence to Underpin CAD

Daniel Moss, Analyst

Canadian Dollar, EUR/CAD, CAD/JPY, Coronavirus Vaccinations, Crude Oil, Bank of Canada – Talking Points:

  • Rising bond yields notably weighed on market sentiment during APAC trade and in turn hampered risk assets.
  • The hawkish shift of the BoC and the notable divergence in vaccination rates may allow the Canadian Dollar to extend gains against the Euro and Japanese Yen in the near term.
  • EUR/CAD eyeing a push to fresh yearly lows after clearing key support.
  • CAD/JPY looking to fulfil an Ascending Triangle’s implied measured move.

Asia-Pacific Recap

A renewed rise in global bond yields notably weighed on equity markets during Asia-Pacific trade, as investors anticipate further details behind President Biden’s infrastructure spending package. Japan’s Nikkei 225, Hong Kong’s Hang Seng Index, China’s CSI 300 dropped 0.66%, 0.2% and 1.07% respectively. Meanwhile, Australia’s ASX 200 rose 0.78% on the back of robust PMI figures out of China and a 21.6% rise in the approval of local building permits in February.

In FX markets, the commodity-linked CAD and NOK largely outperformed alongside the US Dollar, while the negative-yielding Swiss France and Japanese Yen lost ground. Gold prices slipped temporarily below $1680 per troy ounce before recovering, as yields on US 10-year Treasuries climbed just under 3 basis points.

Looking ahead, German and US employment data for March headline the upcoming economic docket, alongside January GDP figures out of Canada.

Canadian Dollar Forecast: Hawkish BoC, Vaccine Divergence to Underpin CAD

DailyFX Economic Calendar

Vaccination Divergence, Hawkish BoC to Buoy CAD

The Canadian Dollar has gained a significant amount of ground against the lower-beta Euro and Japanese Yen, climbing 5.6% and 8.4% respectively since the start of the year. This prolonged period of strength has seemingly come on the back of the resilience seen in oil markets, despite the notable lack of demand throughout 2020, and the Bank of Canada’s relatively hawkish stance in comparison to the majority of its peers.

The BoC shocked market participants last week by announcing the rollback of several emergency liquidity programmes and hinted that it will taper its monetary policy settings in the coming months, as the local economy continues to bounce back strongly. A blockage at the Suez Canal sparking global supply distribution fears also contributed to the Loonie’s recent burst higher, as crude oil prices bounced back above $60 per barrel.

Canadian Dollar Forecast: Hawkish BoC, Vaccine Divergence to Underpin CAD

Indeed, with OPEC+ expected to maintain all of its output curbs at its meeting later this week, oil prices may continue to gain ground and drag the commodity-linked Canadian Dollar along for the ride. Moreover, the notable divergence in vaccination rates between Canada, Japan and the European Union may also drive the EUR/CAD exchange rate lower, while simultaneously pushing CAD/JPY higher.

12.3% of Canadians have received at least one dose of a Covid-19 vaccine, while only 11% of EU residents and a poultry 0.7% of Japanese citizens have been inoculated at least once. With that in mind, further gains look on the menu for the Canadian Dollar in the near term.

EUR/CAD Daily Chart – Extreme RSI Readings Hint at Swelling Bearish Momentum

Canadian Dollar Forecast: Hawkish BoC, Vaccine Divergence to Underpin CAD

Chart prepared by Daniel Moss, created with Tradingview

From a technical perspective, the outlook for EUR/CAD remains overtly bearish, as prices slice through a multitude of key support levels and plunge to the lowest levels since February 2020.

With the RSI sliding back into oversold territory, and the MACD indicator tracking at its most negative levels in two years, further losses look more than likely in the near term.

A daily close below the November 2019 high (1.4772) would probably intensify selling pressure and open the door for price to challenge psychological support at 1.4700. Clearing that brings confluent support at the 78.6% Fibonacci (1.4631) and uptrend extending from the 2012 lows into focus.

Alternatively, if 1.4770 holds firm, a short-term relief rally back towards the 8-EMA (1.4829) may be on the cards.

CAD/JPY Daily Chart – Eyeing Fulfilment of Triangle Implied Measured Move

Canadian Dollar Forecast: Hawkish BoC, Vaccine Divergence to Underpin CAD

Chart prepared by Daniel Moss, created with Tradingview

CAD/JPY rates are eyeing a push to fresh yearly highs, after surging away from confluent support at the 21-EMA and 100-Fibonacci (86.00), and clambering back above the 87.00 mark.

The development of the RSI and MACD is indicative of significant bullish momentum, as both oscillators track firmly above their neutral midpoints. Bullish moving average stacking also hints at further upside.

A convincing break above the March 18 high (88.08) likely signals the resumption of the primary uptrend and clears the way for the exchange rate to charge towards the October 2018 high (89.22). The Ascending Triangle pattern broken earlier in the year suggesting prices will rise as high as the 90.00 mark in the future.

However, if the March high successfully neutralizes selling pressure, a period of consolidation above 87.00 may ensue.

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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