Canadian Dollar Rate Forecast: Light Pricing of BoC Hike Gives Upside
Canadian Dollar Rate Forecast Key Takeaways:
- The ONE Thing: CAD appears ripe to strengthen. Despite the extreme range-bound nature of USD/CAD there seems to be a lot brewing under the surface as the market is pricing in a 1/3 chance of a BoC rate hike on May 30. With employment data this Friday, a positive print after the strong Ivey PMI data could push up the probability and the Canadian Rate.
- Canadian Dollar rate forecast favors price support at the 55-day moving average at 1.2819 and the May 2 low at 1.2803 with resistance at the May 4 high of 1.2918.
- IG UK Client Sentiment Highlight: Retail selling bias remains, bullish contrarian view emerges
Rate traders are on the fence about what the Bank of Canada will do this time around when they meet on May 30th to decide whether or not to hike. Markets are pricing in a 35.9% probability of a hike or ~1/3 and given the heavyeconomic data this week like employment; it’s fair to say the prospect and the rate is expected to swing.
One key metric that has helped pave the way for rate insight in the past is the spread between the US and CA terminal or long-term implied policy rate via the 3y1d forward rate. When USD/CAD traded at C$ 1.21 per USD back in early September 2017, the CA premium was over 50bps. Now, the US is enjoying the largestpremium as implied by bond traders in ~10-months.
What’s surprising is that the Bank of Canada’s own forecasts for their neutral rate, the rate at which their reference overnight lending rate is neither too restrictive nor too accommodative above the Federal Reserves. Currently, the market begs to differ, but an upswing in CA economic data could help shift the market toward the BoC’s view and in so doing, boost the Canadian Dollar.
Canada’s economic data has been on a downswing, which matches the rest of the world with the Citi Economic Surprise Index recently registering two-year lows, but crude oil recently trading above $70/bbl has continued to support the economy. Additionally, BoC Deputy Governor Timothy Lane recently noted that after a decade of “lackluster, or often worse than that,” globally uneven economic growth that things seem to be set on a ‘better track.” I read that as a nod to brighter days and tighter prices is likely to follow.
G8 Strong-Weak Dashboard Shows Canadian Dollar Sits Atop
Data source: Bloomberg
The strong/weak table above that I share on FX closing bell helps to visualize where there is broad strength in the FX market. Currently, the strongest currency is the Canadian dollar based on an equally weighted 5-day % change with the Japanese Yen as a close second. The weakest currency ahead of the Bank of England is the British Pound that has lost over 2% in the last 5-days.
Key Levels In Focus on USD/CAD
Data source: Bloomberg
The dash-board above gives traders a range of key levels and insight on USD/CAD. 3-key insights are the Volatility band range, which takes an upper and lower 2-std. deviation range of the 20-DMA. Second, the 30-day range is helpful for traders to grasp how much movement has occurred from high to low in the last 30-days. The third point, before painting out the levels is the relation of spot to the 20-DMA. 100% means that spot is equal to the 20-day moving average. A number below 100% means the price currency or CAD is strong relative to the 20-DMA and the US Dollar is weak relative to the 20-DMA.
The S1,S2, & S3 and R1,RS, & R3 help you see what levels are in focus based on recent and implied volatility. RS/S1 are the high and low of the current trading session while R2 & R3 are the 1- & 2-upper standard deviation level of the 1-week forward. S2 & S3 are the 1- & 2-lower standard deviation level of the 1-week forward. It may seem a bit quantitative, but the idea is to understand what levels should be watched based on recent volatility and expected volatility in the direction of the predominant trend.
Technical Focus on the Canadian Dollar – Consolidation continues below crucial resistance
Chart Source: IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT
Looking above, you can see the pushing up against resistance on USD/CAD to the 61.8% retracement near 1.2900. Shorter-term focus remains on trend and momentum per Ichimoku cloud as the price bumps up against Fibonacci 61.8%retracement resistance.
Price appears wedged between clean support at C$1.28 and resistance at C$1.29 per USD. A break below the prior low on the short-term chart at May 2 low 1.2803 could open up a move toward the April 20 low of 1.2760 before retracing more of the post-BoC move.
The upside risk appears well defined at the 2018 high of C$1.3125.
Not familiar with Fibonacci analysis, check out this insightful article
Valuable Insight from IG Client Positioning for USD/CAD: Retail selling activity jumps, biased higher
Data source: IG Client Positioning
We typically take a contrarian view of crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise.
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Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q2 have a section for each major currency, and we also offer a excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.
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---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 t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.
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