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Further Declines for USDCAD?

Technical Bias: Neutral


  • Bank of Canada Governor says new rate cut unlikely, suggesting that current policy environment suitable to support Canada’s recovery.
  • Markets are still betting on an outside possibility of a BOC rate in July.
  • USDCAD forecast to eventually rise to 1.33 next year, according to TD Securities and Scotiabank.

The USDCAD settled above 1.22 on Monday, after plunging around 500 pips last week at the hands of disappointing US data and a status quo Bank of Canada.

Bank of Canada Governor Stephen Poloz signaled on Monday that a new rate cut is unlikely and that current monetary policy was “just about right” to support the recovery in the back-half of the year. The vote of confidence gives the Canadian dollar more room to maneuver in the absence of Fed-speak and presence of lukewarm US economic data.

Canada was the first Group of 7 country to slash interest rates this year to counteract the oil price collapse. The BOC cut its benchmark interest rate to 0.75 percent from 1 percent back in January.

“That amount seems to be about right to restore our track for the Canadian economy for the next year or so and get the output gap to close late in 2016,” Poloz said during a panel discussion at the Bloomberg Americas Monetary Summit in New York.

The USDCAD traded within a wide range on Monday. The USDCAD’s rally was capped at 1.2262 and its downside limited to 1.2179. It was trading at 1.2231 in the early Sydney session. The outlook is neutral, with 1.2130 representing the next support level. A break below that level would expose the 1.2000 handle. On the upside, resistance is likely found at 1.2317 followed by 1.2389.


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Chances of a BOC Rate Cut

Despite growing optimism in the Canadian economy, some market participants are still betting on a rate cut sometime in the latter half of the year. According to The Financial Post, the market is pricing in a 35 percent chance of an interest rate cut in July.

USDCAD Future Levels

The 1.28 region continues to offer a very strong long-term resistance, Given that the USDCAD has gained more than 20 percent over the past year, there is a growing possibility for a drop toward 1.2000. The currency bears are pushing US dollar pairs lower in the absence of stronger confirmation from the Federal Reserve that an interest rate increase is coming.  The extent of this downside is likely to materialize this year, prior to the Fed’s signaling for higher rates.

Long-Term Outlook

The USDCAD could break through the 1.28 resistance and reach 1.33 by the first quarter of 2016, according to TD Securities. That forecast was also echoed by a Scotiabank currency analyst. Toronto Dominion (TD) and Scotiabank are two of Canada’s top-five banks.

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