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In contrast to the US, where the economy is slowing and inflation is accelerating, Canada is following its own path. This fact raises speculation on the timing and expansion of the BoC’s monetary policy, which directly affects USDCAD. Let’s discuss this topic and make up a trading plan.
Monthly Canadian dollar fundamental forecast
The Canadian dollar is trading mixed in 2024. However, the loonie is among the top three best-performing G10 currencies. USDCAD bears can withstand the headwinds thanks to solid commodity market positions, robust US economy, and the Bank of Canada’s reluctance to rush into monetary easing. The pair has been trading in the 1.346-1.361 range since the beginning of February, and markets are waiting to see which of the two neighboring economies will be shaken first.
Jerome Powell has voiced the Fed’s stance quite clearly. If US inflation continues to accelerate, the US central bank will keep interest rates unchanged. If recession risks increase, the regulator will ease monetary policy more than expected. The Bank of Canada has the same outlook, but with consumer price growth falling to 2.8% from 2.9% and core inflation to 2.1% from 2.4% YoY, the odds of monetary expansion starting in June have risen to 70%.
Forex speculates that the overnight rate cut in 2024-2025 will be larger than that of the Federal funds rate, potentially maintaining the USDCAD uptrend. This trend has been supported by the divergence in economic growth, with US GDP growing by 3.4% in Q4, compared to just 1% for Canada. However, robust retail sales data and Canada’s fastest two-month GDP growth in two years are shifting the balance of power.
Canada GDP growth
Source: Bloomberg.
The data shows that the Canadian economy expanded by 3.5%, while its US counterpart is unlikely to add more than 2.8%, according to the Atlanta Fed’s leading indicator. This fact calls into question the notion that the BoC’s monetary tightening has had a more significant impact on GDP than that of the Fed.
As for the strength of the commodities market, which is supposed to support USDCAD bears, it’s all up in the air. Indeed, the loonie is a commodity currency, but the US dollar is also benefiting from the growth in US commodity exports and oil in particular. Western sanctions against Russia and Venezuela have allowed the US to increase its market share in Europe and Asia.
US Crude exports
Source: Bloomberg.
The USDCAD’s trajectory will not be determined by the commodities market, but rather by which economy – the US or Canada – will show signs of fatigue first. In this context, the release of the two countries’ employment data for March could prove pivotal, potentially pushing the pair beyond its current consolidation range of 1.346-1.361. Alternatively, if the data fails to provide a clear direction, the pair could remain within this range for several more weeks.
Monthly USDCAD trading plan
The increase in US non-farm payrolls of 200,000 or more, the persistence of the unemployment rate, and the reluctance of average wages to slow down are solid arguments for buying USDCAD on the breakout of resistance at 1.361. In such a scenario, the risks of the Fed delaying the start of its monetary expansion from June to a later period increase. In this connection, it would be better to adjust the targets from 1,366 and 1,371 to 1,372 and 1,382.
Price chart of USDCAD in real time mode
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.
