Loonie to pause. Forecast as of 05.07.2023

2023.07.05 2023.07.05
Loonie to pause. Forecast as of 05.07.2023logo

If the Bank of Canada raised the overnight rate in June, this does not mean that it will do the same in July. Since then, Canada’s domestic data have deteriorated, which increases the risks of a pause in the rate hiking cycle. Let’s talk about these topics and make up a trading plan.

Weekly Canadian dollar fundamental forecast

When the market loses confidence that the Bank of Canada will raise rates in July, the loonie loses value. The June rate hike to 4.75% surprised investors and sent down the USDCAD to the lowest levels since September 2022. However, the market does not stand still, and a series of disappointing economic reports discouraged the CAD bulls.

It all started with inflation, which in May slowed down from 4.4% to 3.4% on an annualized basis. This is a faster move down than in the US. Therefore, the decrease in the probability of an overnight rate hike by 25 basis points to 5% in July from 64% to 55% looks natural. At the same time, maintaining the chances for an increase in the federal funds rate from 5.25% to 5.5% this month at a consistently high level of approximately 85%-86% encourages the USDCAD bulls.

Dynamics of inflation in Canada and USA

Source: Bloomberg.

While the BoC was pleased by Canada’s economic data in June, the release of a weak April GDP and June PMI data could change its outlook. So far, only 8 out of 33 Bloomberg experts predict that the Bank of Canada will raise the overnight rate to 5% at its next meeting.

RBC suggests the chances of a 25% rate hike are underestimated. However, the example of the RBA means the opposite. The Australian regulator made another pause in July after two increases in the cash rate in May and June. Regulators follow the Fed. If the Fed moves from being decisive to being cautious, trying not to damage the economy, so can the rest.

The oil market doesn’t support the USDCAD bears either. Despite Saudi Arabia’s intention to roll over its commitment to reduce production by 1 million barrels per day until August and Russia’s announcement of a 500,000 bpd reduction in exports, the rise in the oil prices turned out to be temporary. The rally lasted for several hours and then quickly ended. Similarly, the oil price reacted to the June surprise from Saudi Arabia. In April, OPEC+’s decision to cut production took longer to affect prices. Then it was about the monthly rally.

Reaction of the oil price to production cuts

Source: Bloomberg.

Currently, the oil market is dominated by economic data and not fundamental factors related to supply and demand. Worries about a global recession or the retreat of such investors’ fears have a greater impact on prices than the interventions of Saudi Arabia and Russia.

Weekly trading plan for USDCAD

I suppose the oil price won’t resume its rally until China’s economy recovers. Furthermore, the BoC is to take a pause in the rate hiking cycle. Therefore, I recommend adding up to the USDCADlongs entered at 1.3175. A buy signal will appear if the Fed sounds hawkish in the minutes of its June meeting or if the price breaks through the high of 1.329.

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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