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Canadian Dollar Forecast: Loonie Awaits BoC Guidance on QE Pace

Canadian Dollar Forecast: Loonie Awaits BoC Guidance on QE Pace

Rich Dvorak, Analyst

CANADIAN DOLLAR WEEKLY FUNDAMENTAL FORECAST – BULLISH

  • Canadian Dollar remains in demand with strength tracking the surge in oil price action
  • Bank of Canada is widely expected to leave its policy interest rate unchanged next week
  • The Loonie might extend its stretch of gains if the BoC decides to taper its QE program
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The Canadian Dollar gained a considerable amount of ground against its FX peers this past week. Canadian Dollar strength relative to the Euro and Yen stood out most prominently. EUR/CAD plunged 310-pips on balance while CAD/JPY jumped to its highest level since December 2018. USD/CAD price action also edged lower in spite of broad-based US Dollar strength.

CANADIAN DOLLAR PRICE CHART: 1-HOUR TIME FRAME (26 FEB TO 05 MAR 2021)

Canadian Dollar Price Chart Forecast USDCAD CADJPY EURCAD

Canadian Dollar bulls have largely been motivated by the reflation trade and surging crude oil prices. Overall solid economic data out of Canada has been supportive of a stronger CAD as well. This is seeing that a hotter Canadian economy, and housing market in particular, has increased the odds for a less-dovish Bank of Canada.

Learn More – The Canadian Dollar and Oil Price Correlation

That said, the Bank of Canada is on tap to provide markets with its latest interest rate decision this coming Wednesday, 10 March at 15:00 GMT. Though the BoC is widely anticipated to stand pat on rates through 2022, there has been growing speculation that the central bank’s next move will be to taper its pace of asset purchases (i.e. QE) from the current level of C$4-billion per week.

BANK OF CANADA COULD HINT AT REDUCING WEEKLY PACE OF ASSET PURCHASES

Bank of Canada Balance Sheet Chart of Total Assets

This may follow eye-catching headlines from Bank of Canada Governor Tiff Macklem who recently highlighted the risk that households could get stretched due to an overheating housing market. BoC Governor Macklem also pointed out that he is starting to see early signs of excess exuberance in financial markets. Meanwhile, the latest Bank of Canada balance sheet data shows that total assets and its holdings of Canadian government bonds declined week-on-week.

USD/CAD Bearish
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 14% -7% 6%
Weekly 9% 8% 9%
What does it mean for price action?
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If the Bank of Canada does in fact confirm market expectations with guidance on scaling back its bond buying program, FX traders could see another influx of strength across CAD price action. On the other hand, opting for continued patience would likely disappoint hawkish bets and weigh negatively on the Canadian Dollar. In addition to the BoC meeting and broader direction of crude oil prices, the Loonie might also experience volatility around monthly employment data slated to cross market wires later in the week.

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

Connect with @RichDvorakFX on Twitter for real-time market insight

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

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