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Loonie is the winner. Forecast as of 19.09.2023

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The oil price rally is not the only factor pressing down the USDCAD and the EURCAD. Markets expect the Bank of Canada to resume its rate-hiking cycle. Let us discuss the Forex outlook and make up a trading plan for the week. 

Weekly Canadian dollar fundamental forecast

While markets are weighing whether the Fed will make another rate hike or call it a day, the Bank of Canada does not rule out resuming the monetary tightening cycle. Together with the rapid rally in oil, this circumstance turns the Loonie into the best performer in Forex. USDCAD price has fallen to more than a month’s low, and it seems that it can drop deeper.

It all started where it should have ended. After the Bank of Canada once again kept borrowing costs at 5%, Tiff Macklem stunned the markets with an unexpected announcement. According to the BoC governor, the current interest rate level may not be high enough to return inflation to the target, encouraging the USDCAD bears.

Dynamics of Canada’s inflation and BoC interest rate

Source: Trading Economics.

The Bank of Canada’s outlook is fundamentally different from that of the ECB. The European regulator, on the contrary, believes that the current level of rates is enough to force inflation down to the target of 2%. The market reaction convinces us that the risks of a renewed tightening cycle of monetary policy, as in the case of BoC, are a bullish factor for the Loonie. If the central bank, as in the case of ECB, intends to put an end to monetary tightening, this will press drown the euro.

An improvement in the labour market and an acceleration in inflation are required to raise the overnight rate again. And the mosaic is coming together! In August, the Canadian economy added almost three times more jobs than Bloomberg experts expected, wage growth accelerated, and unemployment remained at the same level. It is expected that after producer prices accelerate to 1.3% M-o-M, the same will happen with consumer prices. Their growth rate will increase from 3.3% to 3.8% on an annual basis. Core inflation may also surprise by unexpected growth.

Besides, the rapid rally in oil, which is poised to mark the best quarterly rise since the start of the war in Ukraine, is helping to strengthen the exchange rate of the oil-exporting countries’ currencies. The Canadian dollar is no exception. Production cuts from OPEC+ and US shale fields, coupled with Beijing’s large-scale incentives and improved domestic data in China, support the talks that Brent will soon reach $100 per barrel. This circumstance also encourages the USDCAD bears.

Dynamics of oil and the USDCAD


Source: Trading Economics.

In my opinion, if the US dollar can somehow compete with the Canadian dollar, then the euro has practically no chance. Divergences in monetary policy and economic growth set back the EURCAD bulls. Let’s not forget that the euro area is a net importer of oil, and rising oil prices add negativity to the economy of the currency bloc.

Weekly trading plan for USDCAD and EURCAD

In my opinion, the Fed’s hawkish stance could lead to short-term growth in USDCAD, which should be used for entering shorts with targets at 1.339 and 1.335. A breakout of the support at 1.436 will be a signal to sell the EURCAD with targets at 1.422 and 1.41.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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