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Canadian Dollar Forecast: USD/CAD Reversal Risks on the Horizon

Canadian Dollar Forecast: USD/CAD Reversal Risks on the Horizon

Justin McQueen,

CAD, USD/CAD, Analysis and Talking Points

  • CAD Risks Are Lower
  • BoC’s Hawkish Outlook is Far Too Aggressive

CAD Risks Are Lower

Unlike its high beta counterparts, the Canadian Dollar has been slightly shielded from the risk aversion stemming from the Fed’s hawkish minutes amid the impressive resilience in the oil market with Brent crude futures above $82/bbl.

As I have said, previously, I expect the Canadian Dollar to be extremely sensitive to the upcoming key data releases, given the aggressive hawkish pricing for the BoC. As well as the fact that money markets are pricing a 65% probability for a hike at the January meeting, which I would say is tough to see at present, given recently announced lockdown measures in Ontario and Quebec. Meanwhile, the BoC also maintained their guidance at the December meeting, by reiterating that they will not raise rates until the middle quarters.

BoC Rate Guidance

The Governing Council judges that in view of ongoing excess capacity, the economy continues to require considerable monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s October projection, this happens sometime in the middle quarters of 2022. We will provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation target.

A reminder that at the December meeting, the BoC’s disappointment relative expectations, marked the recent bottom in USD/CAD at 1.2600. In turn, with markets aggressively priced and with risk appetite on the back foot, risks to CAD look titled to the downside.

USD/CAD Chart: Daily Time Frame

Source: Refinitiv

Economic Calendar

Source: DailyFX

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