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Canadian Dollar Rate Forecast: Dovish Bank of Canada and Trade Concerns

Canadian Dollar Rate Forecast: Dovish Bank of Canada and Trade Concerns

Tyler Yell, CMT, Currency Strategist


What's on this page

Canadian Dollar Rate Forecast Key Takeaways:

  • USD/CAD Price Forecast: Close above 1.3000 would quiet CAD Bulls for a while. Pair whipsaws late in session.
  • Bank of Canada has more reasons to be cautious as Trade War concerns are rising
  • IG UK Client Sentiment Highlight: Retail selling jumps, bias bullish

Want to track trade tensions sense US President Donald Trump’s Economic Advisor, Gary Cohn resigned on presumed disagreements on trade tariffs? If so, the Canadian Dollar is a popular way to do so, and many are acting on the presumption that tariffs will hurt Canada by shorting the Canadian Dollar against the EUR and JPY as well as other currencies.

Bank of Canada Has Reason to be Caution

While the Bank of Canada was expected to leave rates on hold, the focus was on their statement regarding a growing concern about Trade and NAFTA.

The line that rightfully grabbed the market's attention, and saw the Canadian Dollar fall was:

“However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.”

Another concern voiced by the banks was household credit growth weakening while wage growth stays below levels consistent with full employment. The statement caused Overnight Index Swaps markets to price in the lowest probability of a BoC rate hike in April, currently at 33% chance, since December.

Traders turn eyes to 1.30/32

It would appear that everything is for the USD/CAD Bulls with the March BoC meeting in the rear-view mirror that read as slightly Dovish. Now, markets are beginning to price in the potential for four hikes by the Federal Reserve by year-end, and options markets are seeing open interest jump on protection against six hikes by March 2019.

At the same time, Bank of Canada is likely trying to simply hold the view that two hikes remain on the table. A deterioration of the view would likely see a further breakdown in the Canadian Dollar. Traders looking for sharper CAD downside would find it by looking to CADJPY lower or EURCAD higher.

Technical Focus on the Canadian Dollar

Traders will likely first notice that the Canadian Dollar is reaching a level that was seen as a pivot in January of 2017. Another key level on the chart is the 100-Week Moving Average at 1.2984. A weekly close above, if the technical patterns of recent USD/CAD history followed suit, would likely mean that we’re in for a prolonged period of CAD weakness like the one witnessed from 2013 to early 2017. This means that what happens to the pair around the 100-WMA could be paramount for the pair’s LT direction.

USD/CAD Weekly Chart: Higher Into Key Resistance of 100-WMA, Trendline at 1.32

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Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

USD/CAD has moved aggressively higher by ~400bps since February 26. Now, the 1.32 two-year trendline resistance on the chart above looks to be an attractive target should CAD weakness continue.

Traders can also be looking to the prior triple-top resistance near 1.2920 from Q4 2017 as a potential polarity point that USD/CAD has cleared on the upside. A break below 1.2920 would open up the possibility of a deeper pullback to the February 26 low at 1.2603. However, above 1.2603, we’ll continue to look for further CAD depreciation against the greenback and others.

Learn about Trading With Moving Average

Unlock our Q1 forecast to learn what will drive trends for the US Dollar at the 2018 open!

Valuable Insight from IG Client Positioning for USD/CAD: Retail selling jumps, bias bullish

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Data source: IG Client Positioning

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise.


Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as trading educational resources. Read more of Tyler’s Technical reports via his bio page.

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