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USDCAD Chart

Fundamental Forecast for CAD: Bullish

Talking Points:

  • Expectations for future Bank of Canada interest rate hikes drop
  • OPEC agreement to cut oil production to support the Loonie
  • Event risk to the US Dollar may benefit its Canadian Dollar counterpart

The Canadian Dollar depreciated slightly against its US Dollar counterpart from the 1.3250 level to 1.3300 USD/CAD over the last week of trading. This occurred against a volatile backdrop due to the anticipated policy interest rate decision from the Bank of Canada (BOC), releases of key economic data and speculation over OPEC leaders gathering to agree on curbing oil output.

As widely expected, the BOC decided to maintain their overnight policy rate target at 1.75 percent. In its press release immediately following the decision, Canada’s central bank struck a cautious tone over recent economic developments at home and globally. Key concerns cited cratering oil prices, muted business investment and slowing growth across major developed countries. Consequently, markets interpreted the comments as dovish and significantly reduced their expectations for future rate hikes. However, the steep drop in expectations could be an exaggerated knee-jerk reaction.

BOC Meeting Hike Probabilities

The implied probability of future rate hikes declined for most of November paralleling oil’s steep selloff over the period due to a worsening supply glut as fears of a deteriorating global economy mount. BOC noted that the country’s energy industry “will likely be materially weaker than expected.” In turn, this may evolve into a major headwind for the Canadian economy as well as the Canadian Dollar seeing that oil production accounts for $170 billion out of the country’s $1.8 trillion GDP – just shy of 10 percent of total economic output. While the BOC stated that the Canadian economy expanded in line with projections for the third quarter, this could change over the final months of the year as economic data is suggesting positive momentum is fading.

On a more positive note, business investment should pick up with the recently signed US-Mexico-Canada (USMCA) agreement providing more clarity on trade between the countries. Also, employment numbers reported at the end of the week surprised to the upside. The Canadian unemployment rate dropped to 5.6 percent from 5.8 percent and the net change in employment crushed forecasts by adding over 94,000 jobs compared to the expected 10,000. Another development that could support a beaten down Loonie is the recent agreement by OPEC and its partners to cut oil production by 1.2 million barrels per day. Crude oil leapt nearly 6 percent on the news which also sent the Canadian Dollar higher.

The data dependent BOC will closely examine housing stats reported next week as it looks for signs of a sustained rebound across the sector. As for its American counterpart, the US market could come under pressure from highly anticipated data points that pose material downside event risk to the Greenback. With the US Dollar already starting to lose some of its luster due to weaker than expected economic developments and seemingly dovish remarks from the Federal Reserve, the USDCAD could see some downside in the short term due to the recent shift in sentiment.

--Written by Rich Dvorak, Junior Analyst for DailyFX.com

--Follow on Twitter @RichDvorakFX

Other Weekly Fundamental Forecast:

Japanese Yen Forecast - USD/JPY to Track October Range as Attention Turns to U.S. CPI

Oil Forecast - OPEC And Friends Production Cut Exceeds Expectations, Crude Rallies