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Canadian Dollar Forecast: Inflation Beat, USD/CAD Continuing to Slide

Canadian Dollar Forecast: Inflation Beat, USD/CAD Continuing to Slide

Justin McQueen,
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Canadian Dollar Analysis & News

  • Canadian CPI Prints Above Expectations
  • USD/CAD Trend Remains Your Friend, Fade Topside
  • Short Positioning Suggests Pain Trade is Higher CAD

Headline Canadian CPI printed above expectations on both the monthly and yearly rates at 0.2% (vs 0.1%) and 4.4% (vs 4.3%) respectively. Meanwhile, the BoC’s preferred measure of inflation (average of median, trim and common CPI) rose to 2.67% from 2.56%. Rising price pressures had also been echoed by businesses in the most recent BoC Business Outlook Survey, while a strong labour market report is likely to see a more optimistic BoC forecast at next week’s meeting with another QE taper expected to go ahead as planned.

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Market Reaction: Overall, a relatively muted reaction in the Canadian Dollar with the current unwind of USD longs largely dictating the state of play in G10 FX. What’s more, the trend remains your friend with USD/CAD as it the pair makes its descent towards the 1.20 handle. So far bounce backs have been limited to the 5DMA, however, should we see a more sizeable lift, topside resistance at 1.2420 should cap. Fading rallies I suspect is the strategy heading into the Bank of Canada meeting as oil and equities remain firm.

USD/CAD Chart: Daily Time Frame

Source: Refinitiv

Positioning: Additionally, with net shorts in the Canadian Dollar hovering around YTD highs, this would suggest that the pain trade is higher CAD and thus, any pullbacks in the Loonie may be used to unwind short positions, reinforcing the view that CAD may continue to find dip demand.

USD/CAD Positioning

Source: Refinitiv, CFTC

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