2023.09.01 2023.09.01
Don’t undervalue the loonie. Forecast as of 01.09.2023Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/
When the Canadian dollar moves in the direction opposite to the oil price direction, we wonder if the CAD has been valued right. The USDCAD’s rally looks excessive amid the strong oil market, but the oil market is not the only factor in the loonie’s price. Let’s discuss it and make a trading plan.
Fundamental forecast for the Canadian dollar for today
The Canadian dollar is noticeably weak despite oil growth in July-August. Moreover, the comparable rise in US and Canadian bond yields indicates that the loonie is undervalued. The USDCAD is growing on such factors as the end of the BoC’s tightening cycle, the worsening of global risk appetite, and China’s failure to recover fast, which badly affects the commodities market and commodity currencies.
Thirty-one out of thirty-four Reuters experts predict that the overnight rate will be kept at 5% at the BoC’s meeting on 6 September. Tiff Macklem and his colleagues can afford to make a pause as the economy slowed to 1.1% in 2Q and retail sales — to 0.1 in June. Loan growth slowed to 4% in the country’s four biggest banks in April-June, compared with a year-ago value of 9.8%, and the labor market stats worsened.
On the other hand, the housing market is reviving, and inflation rears its ugly head: consumer prices grew to 3.3% in July. All that forces the Bank of Canada to have its finger on the pulse. At the same time, 8 out of 34 Reuters experts predict an overnight rate hike to 5.25% before the end of 2023.
BoC’s rate and inflation
Source: Trading Economics.
As for the fed funds rate, it’s more likely to rise to 5.75%. The derivatives market estimates the chance at 40%. However, the indicator will go down if US macrostatistics come in worse. Bad economic news will have a positive effect on stock indexes. The S&P 500’s growth will improve global risk appetite and help the USDCAD bears to develop a correction of the uptrend.
Oil is on the loonie’s side. Oil production and export cuts in Saudi Arabia and Russia and a decline in shale oil production in the US set a favorable background for the currencies of oil-exporting countries. Global demand remains weak because of China, but Beijing’s active stimuli let us hope that the government’s target GDP of 5% will be reached in 2023. As a result, the oil market remains bullish, signaling that the USDCAD is overbought.
Oil and USDCAD trends
Source: Trading Economics.
I think the CAD’s time will come in the week ending 8 September when the BoC makes an overnight rate decision and the Canadian labor market report is published. However, we’d better open trades in the USDCAD now based on US jobs data as they will impact the US dollar and risk appetite.
Trading plan for USDCAD for today
Non-farm payrolls of 150 thousand or lower will allow us to sell the USDCAD with a target of 1.344 and 1.34 on expectations of the US slowing economy and the end of the Fed’s tightening cycle. Conversely, non-farm payrolls at 170-190 thousand will indicate that the US is strong enough to withstand aggressive monetary restrictions, raising the chance of a fed funds rate hike to 5.75%. In the second scenario, we will buy the pair above 1.352.
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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