CAD: forbidden fruit. Forecast as of 19.05.2023

2023.05.19 2023.05.19
CAD: forbidden fruit. Forecast as of 19.05.2023logo

The “buy and hold” strategy isn’t good for the USDCAD. The pair has been rushing between the upper and the lower limit of the 1.33-1.38 range since last autumn. When will it stop consolidating, finally? Let’s discuss it and make a trading plan.

Weekly fundamental forecast for the Canadian dollar

The Canadian dollar looks like a tasty morsel at first sight. It likes the improvement of global risk appetite, so the good news for the USDCAD bears is that Nasdaq Composite has rallied more than 20% since the beginning of the year. Oil looks oversold, and its recovery will be a friendly wind for the loonie. Canada’s solid neighbor — the US — supports the Mexican peso in the G10 currency race. Finally, better domestic macrostatistics revive the chance of an overnight rate hike. Unfortunately, all that has not helped the CAD yet.

If we look closely, the loonie is a forbidden fruit. You’d like to taste it, but you fear the consequences. You’d better be careful with such an unstable currency. The USDCAD has been stuck in the 1.33-1.38 range since September 2022. Any attempt to break it out failed. At the beginning of 2023, there was much optimism regarding the loonie. China’s fast post-pandemic recovery was supposed to raise oil prices, while the Fed was expected to make a dovish turn. Those expectations didn’t come true.

However, optimistic sentiment is gradually reviving in May. Speculative net shorts in the CAD have dropped from 4-year highs. CIBC estimates that the USDCAD will return to 1.33 sooner than later.

Speculative trades in CAD

Source: Bloomberg.

The reasons lie in the economy’s surprising tolerance to the BoC’s most aggressive tightening in the past decades. The overnight rate has grown by 425 b.p. to 4.5% since the start of the cycle in March 2022, and it’s been on a plateau since January. Investors have hoped for a fall in 2023 for a long time, but strong stats on the Canadian labor market in April ruined those hopes and supported the USDCAD bears. Employment grew by 41.5 thousand, against a forecast of +20 thousand, while unemployment remained at a record low of 5%. So, the loonie has had the best one-day evolution since early January.

CAD’s reaction to labor market stats


Source: Bloomberg.

Moreover, the chance of the BoC’s new restriction cycle in June grew to 80% after inflation suddenly rose from 4.3% to 4.4% for the first time in the past ten months, against Bloomberg’s consensus estimate of 4.1%. Tiff Macklem had to apologize, saying it was a temporary inflation hike and prices would fall later. That reduced the chance of a 25-point overnight rate rise to 60%, but the risk remains high, supporting the loonie.

Weekly trading plan for USDCAD

The Canadian dollar’s unstable nature is due to many factors that affect its rate. For us to identify a further direction, the USDCAD must break outside the consolidation range of 1.341-1.356. So, we can place pending orders to trade a breakout, with the first buying target at 1.364 and the first selling target at 1.332.

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.

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