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Canadian Dollar Forecast: USD/CAD Looks Poised for Further Upside, BoC Rate Decision Holds the Key

Canadian Dollar Forecast: USD/CAD Looks Poised for Further Upside, BoC Rate Decision Holds the Key

Zain Vawda, Analyst

CAD FUNDAMENTAL FORECAST: BEARISH

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CAD WEEK IN REVIEW

The Canadian Dollar did not enjoy its most productive week against its major counterparts printing losses against the Dollar, Euro and the British Pound. CAD was weighed down by poor economic data indicating a slowdown in the economy while the early week decline in oil prices didn’t help matters. Lackluster GDP growth in September of 0.01% was followed by October’s flat figure while on a positive note wage and salary pressures seem to have moderated as well.

OIL PRICES PUSH CURRENT ACCOUNT BACK INTO A DEFICIT

Canada’s current account deficit is back at historic levels with a third quarter shortfall of 11.1 billion Canadian Dollars as lower oil prices weighed. Oil struggled in the first half of the week as unrest in China over the ‘Covid Zero’ strategy intensified pushing oil to its lowest level since December 2021. Oil has since rebounded on news that OPEC+ could further cut supply when they meet this weekend. OPEC+ will meet on Sunday to decide output levels moving forward with a further cut likely to boost oil prices and in turn the Canadian Dollar.

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BANK Of CANADA INTEREST RATE DECISION

The Bank of Canada faces a challenging decision at its upcoming policy meeting on December 7. Governor Tiff Macklem has maintained that further hikes are indeed needed to bring inflation under control, but the central bank has faced criticism from a number of key stakeholders. There have been signs of a slowdown in the economy yet a drop toward a 25bp hike at this stage may not appeal to Governor Macklem as the US Federal Reserve is expected to continue hiking even if it is at a slower pace. The Canadian Dollar has struggled against the greenback this year while a pause now or a 25bp hike could leave the loonie vulnerable to further losses against the greenback in the months ahead. Fridays Jobs data added to the challenges facing the Bank of Canada as the unemployment rate declined to 5.1% while the employment change numbers beat estimates coming in at 10.1K. The robust jobs data could serve as justification for a potential 50bps hike by the Bank of Canada.

CAD Economic Calendar for the Week Ahead

As December kicks off, the Canadian economic calendar is set to enjoy a subdued week. Over the course of the week, there is only two ‘high’ rated data releases, whilst we also have two ‘medium’ rated data release.

Here are the two high ‘rated’ events for the week ahead on the economic calendar:

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For all market-moving economic releases and events, see the DailyFX Calendar

USD/CAD D Chart, December 2, 2022

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Source: TradingView, Prepared by Zain Vawda

OUTLOOK AND FINAL THOUGHTS

In a week which saw the US Dollar take a beating the Canadian Dollar surprisingly struggled against the greenback. Price action on USD/CAD continues to print higher highs and higher lows since November 15 with another leg to the upside looking likely. Price is currently caught between the 20 and 50-day MA with a break above opening up a retest of the 1.3800 resistance area.

The Bank of Canada’s rate decision is expected to drive the pair in the week ahead with it unclear whether we will see a 25 or 50bps hike. Markets have all but priced in a 25bps hike while there remains a 33% chance of a 50bps hike. Looking at Friday’s jobs data coupled with the elevated inflation figures and Governor Macklems ongoing rhetoric another 50bps hike seems more likely at this stage. However, If the Bank of Canada has proved anything this year it’s that they know how to spring a surprise.

USD/CAD Bearish
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 66% -21% 16%
Weekly -2% -7% -4%
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--- Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda

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

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