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Canadian Dollar Forecast: USD/CAD Rips Higher - Further Gains Ahead?

Canadian Dollar Forecast: USD/CAD Rips Higher - Further Gains Ahead?

Justin McQueen, Analyst

CAD, USD/CAD, Analysis and Talking Points

  • Hawkish Twist as Fed Signal Two Hikes in 2023
  • USD/CAD Soars, CAD Bulls Head For Exit

Hawkish Twist as Fed Signal Two Hikes in 2023

FOMC Recap: A hawkish surprise from the Federal Reserve, with the main takeaway being that the dot plot has shifted towards two rate hikes in 2023 from a previous of zero. Expectations heading into the release had been a 50/50 call that the Fed would shift to only one rate hike in 2023. Therefore, the dot plots are much more hawkish relative to expectations and hence the sizeable move in the greenback.

Now while Powell had talked down the importance of the dot plots, this is not at all surprising, it has been well documented that he hasn’t exactly been the biggest fan of the dot plots for a while, with criticisms of the dot plot dating back to 2014. Alongside this, the dot plots have not got the best track record of accurately predicting where rates will go, what is important, however, is the signalling of the trajectory of interest rates.

On inflation, Chair Powell pointed out that inflation could turn out to be more persistent than previously expected. This is reflected in the economic projections with Core PCE seen at 3% from 2.2% in 2021, thus inflation in the short run looks to be more elevated than expected. That said, the view of transitory inflation remains the base case for the Fed as the 2022 Core PCE projection had been only upgraded by 0.1ppt.

FOMC SEP

Canadian Dollar Forecast: USD/CAD Rips Higher - Further Gains Ahead?

Source: Federal Reserve

Talk About Talk About Taper: During the press conference, Powell confirmed that this was the “talking about talking about” meeting with regard to tapering (minutes will provide further clarity). What’s more, Powell noted that while progress has been made there is still ways to go. Despite the hawkish surprise by the Fed, my view remains unchanged that this has not altered the (speculative) timeline of when the Fed will signal a taper, which I continue to expect to be around the August Jackson Hole Symposium. Keep in mind, the Fed maintained the guidance that further substantial progress is needed and as we move closer to Jackson Hole, the time is understandably nearing the taper signal.

USD/CAD Ripping Higher

As is the case with major USD pairs, the greenback is ripping higher following the FOMC decision, and given that speculators hold a sizeable short positioning in the greenback, there is fuel for the greenback to rise. In turn, USD/CAD has corrected higher with the May peak (1.2350) being tested and with speculative net longs in CAD at a 96 percentile (over a 3yr period), the currency remains vulnerable to a larger correction.

On the tech side, we have seen a sizeable move over the last 24hrs, making 1.2350-60 a key pivot area as to whether some upside begins to fade a touch. A continuation of the move through the aforementioned pivot area could see a stretch target towards 1.2429.

USD/CAD Chart: Daily Time Frame

Canadian Dollar Forecast: USD/CAD Rips Higher - Further Gains Ahead?

Source: Refinitiv

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