We are bullish of USD/CAD and see the recent dip as a longer term buying opportunity. Our view of the fundamentals, sentiment and key technical levels of support and resistance to watch are outlined below.
In terms of USD/CAD we agree with the view below from CIBC:
“Contrary to market expectations, the BoC is unlikely to send Canada’s overnight rate beyond the Fed’s destination of 3.25%. Canada’s debt-burdened households and mortgage renewals will see rate hikes weigh more on discretionary consumer spending in Canada.”
They conclude: “This points to a slightly lower terminal rate for the BoC overnight rate, although we’re leaning towards a 3% peak rather than our prior 2.75% after the May inflation data.” They add…
“Markets appear to be overpricing both BoC and Fed tightening this year, but comparatively more for the BoC and that recalibration will lead the CAD to end the year weaker, with USDCAD expected to reach 1.31 by then.” ( CIBC)
Canadian V US Interest Rates
We expect the Fed rate rate to move as high as 4% although the market is less bullish than us.
The market thinks the Fed will be less aggressive with interest rate hikes going forward due to the risks of a recession in the US but as we have pointed out in other articles, the Fed are focused on bringing inflation down as its not coming down without aggressive rate hikes.
In terms of USD/CAD its not just about rates we need to keep in mind the slow up in the global economy which is bearish for the CAD and bullish for the USD.
Global Economy Slowing to Pressure the CAD Lower
Many traders see high crude prices as bullish for the CAD but this is now getting priced in and we think a big break to the downside could be coming.
Many commodities have seen heavy price falls recently and we think crude could follow. The supply disruptions caused by the Russia Ukraine war are getting priced in and the global economy is slowing which will weigh on crude going forward.
The CAD has also benefited from the recent bounce in the stock market but we think the bounce is just a correction of oversold and we expect another sell off to the downside.
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Technical Analysis
In terms of the monthly chart, we see a clear break of the 1.300 level following through to 1.3500.
In terms of the key levels on the daily chart, we have support at 1.2800 and then 1.2730. In our view, we would buy above 1.2900 and then look to add on a move above 1.300.
