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Fundamental Forecast for CAD: Neutral

USDCAD Analysis and Talking Points:

  • Short Term CAD Direction Dependent on NAFTA Outcome
  • Bank of Canada Governor Poloz to Emphasis Gradual Tightening

See our Q3 CAD forecast to learn what will drive the CAD through the quarter.

Short Term CAD Direction Dependent on NAFTA Outcome

Headline risk for the Canadian Dollar remains at elevated levels as Canada looks to reach a NAFTA agreement in principle with the US. As such, the near-term direction for the Loonie is very much dependent on the outcome from the latest NAFTA talks, with an agreement likely to support the Canadian Dollar, which would likely see USDCAD retest the recent lows at 1.29. The trend for USDCAD remains bearish provided the pair holds below 1.30 with 1.2850 eyed as the next significant target. Failure for Canada and the US to reach an agreement could see the pair breach the top of the bearish channel around 1.3110 to make a run in on 1.32.

Bank of Canada Rate Decision

Market pricing for a rate hike at next week’s Bank of Canada rate decision are relatively low at 20%, which suggests that the BoC will hold off for now (most likely scenario of October rate hike). Alongside this, with Q2 GDP printed roughly in line with the BoC’s forecast at 2.9% (BoC exp. 2.8%) and Poloz highlighting at the Jackson Hole Symposium that the boost in inflation has been due to transitory factors, further suggests that the Governor will likely emphasise a gradual approach to raising rates.

CAD Rate Forecast: Short Term CAD Outlook Dependent on NAFTA Outcome

Canadian Employment Report

Another key risk event on the economic schedule for the Loonie will be the latest jobs report at the backend of the week. As a reminder, the prior employment report had shown a robust jobs gain of 54k, however, the components were slightly softer with the contribution coming from part time jobs. Consequently, given the risk events this week, USDCAD 1-week implied volatility are at lofty levels of around 120pip breakeven.

Next week’s Economic Calendar

CAD Rate Forecast: Short Term CAD Outlook Dependent on NAFTA Outcome

Source: DailyFX

USDCAD PRICE CHART: DAILY TIMEFRAME (January-August 2018)

CAD Rate Forecast: Short Term CAD Outlook Dependent on NAFTA Outcome

Chart by IG

USDCAD Technical Levels

Resistance 1: 1.3115 (23.6% Fibonacci Retracement)

Resistance 2: 1.3180-1.32 (Resistance Area)

Support 1: 1.2940-50 (Support Area)

Support 2: 1.2900 (Weekly low)

Support 3: 1.2875 (200DMA)

CAD TRADING RESOURCES:

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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Japanese Yen Forecast - USD/JPY Initiates Bearish Sequence Amid Failed Run at August-High

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British Pound Forecast – Sterling Dips Look Attractive After Brexit Breakthrough

US Dollar Forecast – US Dollar Aims Higher on Haven Demand, Yield Appeal

Gold Forecast - Gold Prices Primed for Seasonal Strength, NFPs on Tap

Australian Dollar Forecast – Australian Dollar Unlikely To Get Much Lift From Crowded Data Week