CAD Rally: Too Much, Too Soon?

Talking Points:

  • USD/CAD falls to lows seen in May 2015 on Rate Hike
  • Further hikes are being mooted but will the BoC wait?
  • USD weakness is exacerbating the move.

Fundamental Forecast for CAD: Neutral

We remain neutral on CAD although any further sharp upward moves may open the opportunity to sell CAD against the USD for a short-term reversal. USD/CAD has fallen 12% in the last four months – from 1.3790 to 1.21350 – while the USD Dollar Basket has fallen 7.6% over the same timeframe.

The Bank of Canada (BoC) has hiked rates by 0.25% at both of the last two policy meeting (July and September) leaving commentators divided over the timing of the next move. Commentating on this week’s hike, the central bank noted that recent economic data had been ‘stronger than expected’ supporting the bank’s view that growth in Canada is becoming ‘more broadly-based and self-sustaining’. However the governing council also noted that there was some excess capacity in Canada’s labour market, while given elevated household indebtedness, ‘close attention will be paid to the sensitivity of the economy to higher interest rates’.

The next meeting on October 25 also coincides with the latest quarterly Monetary Policy Report where BoC governor Stephen Poloz will give updated guidance on the economy, including inflation projections.

Looking at the weekly USD/CAD chart the strength of the Loonie can be clearly seen, but the last sharp downturn after this this week’s hike has left a ‘gap’ that needs filling back to 1.23380 before the Loonie can appreciate further. Further upside resistance comes in the form of July’s old ‘triple-bottom’ at 1.24120 while the May 2015 low at 1.19190 is the first target for CAD bulls.

Chart: USD/CAD Daily Time Frame (May – September 8, 2017)

CAD Rally: Too Much, Too Soon?

Chart by IG

And you can check out our latest Q3 trading forecast for the Canadian Dollar here.

--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1