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Canadian Dollar Forecast: Loonie Eyes CPI Data Due – Levels to Watch

Canadian Dollar Forecast: Loonie Eyes CPI Data Due – Levels to Watch

2019-12-17 19:16:00
Thomas Westwater,
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Canadian Dollar Technical Forecast Ahead of Inflation Data Due

  • The Canadian Dollar sees above-average implied volatility headed into tomorrow’s CPI report release and brings CAD price action into focus for Wednesday’s trading session
  • The Loonie has recovered some lost ground after the BOC’s dovish shift revealed at the central bank’s most recent monetary policy update
  • CAD prices could be at risk of reversing back lower if inflation data disappoints and causes traders to accelerate BOC interest rate cut bets

The Canadian Dollar has been a prominent performer through 2019 among major currency pairs up until October’s shift in monetary policy from the BOC, which injected some bearishness across CAD prices. Although the BOC left interest rates unchanged as expected, the Loonie reacted negatively to the commentary due to dovish language conveyed by the BOC Governing Council and Stephen Poloz who heads the central bank.

Wednesday’s trading session could be pivotal for CAD price action, however, with Canadian inflation data due for release at 13:30 GMT and will accompany a barrage of other high-impact event risk scheduled on the economic calendar. The Canada CPI report for November stands to impact the Canadian Dollar seeing that inflation is the primary rudder that guides BOC monetary policy.

CHART OF CANADIAN INFLATION – BOC KEY INFLATION INDICATORS

BOC CPI Chart

*Source: Bank of Canada

The consensus estimate for November’s CPI YoY figure is looking for a print of 2.2% according to Bloomberg survey expectations, which would be up noticeably from last month’s reading of 1.9%. If these expectations manifest it would constitute the highest inflation reading since October of 2018 and would likely push the Canadian Dollar higher as expectations for future BOC rate cuts diminish.

While a better-than-expected CPI reading could lower currently priced expectations for the BOC to cut interest rates next year, any meaningful shift in policy would need to be met with a material spike or drop in inflation.

BOC Policy Rates Futures

Overnight swaps are pricing in a dovish outlook for Canada’s policy rate, as the Implied rate through 2020 lingers under the current rate of 1.75%. As the BOC’s objective concerns solely inflation and hitting the 2% target rate, the futures could be taken as a proxy measurement for inflation remaining subdued through 2020.

CAD Implied Volatility Chart

Implied volatility across Canadian Crosses has spiked proceeding tomorrow’s CPI data print. The most volatility is expected in the GBP/CAD cross with an overnight implied volatility reading 10.6% versus its average 20-day reading of 9.8%, however this volatility is likely skewed from the ongoing Brexit drama. When viewing the other crosses, Canadian Dollar overnight implied volatility hovers above the 80th percentile and likely reflects how the market is placing significant weight on upcoming inflation data.

USDCAD Daily Chart

USDCAD Daily Chart

The Loonie has performed well against the US Dollar through most of 2019 as the Federal Reserve cut rates on three occasions this year while the Bank of Canada is as one of the last major central banks not easing monetary policy. USD/CAD could see a shift lower toward the 1.3100 handle and ascending support trendline if inflation expectations meet or beat consensus estimates tomorrow.

CADJPY Daily Chart

CADJPY Daily Chart

Against the Yen, the Canadian Dollar has bounced from monthly lows and heads toward overhead support from October highs of 88.537. With trade tensions recently seeing some relief between the US and China, a bullish bias in the CAD/JPY cross may materialize further should inflation show a sticky reading tomorrow.

GBPCAD Daily Chart

CADJPY Daily Price Chart

As previously mentioned, GBP/CAD is expected to be the most active Canadian Dollar currency pair on Wednesday judging by overnight implied volatility on the Loonie. The Sterling has recently made a solid shift higher recently with Tories topping the UK General Election last week but has since come back under pressure and pushed spot GBP/CAD prices back toward the 1.7260 level. Should inflation show a bullish print tomorrow, the cross could extend its downward move further as the Canadian Dollar strengthens. Watch for the 50-day moving average to be the next line of defense in the cross.

--Written by Thomas Westwater, Intern Analyst for DailyFX.com

Contact and follow Thomas on Twitter @FxWestwater

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

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