USD/CAD likely to fall as Canadian rate hikes priced in
USD/CAD has fallen to the lowest since March 2 today and there is a considerable case for further declines. This pair fell a cent in the aftermath of the March 8 Bank of Canada decision but has struggled to make further progress despite the BOC’s hawkish comments and an outlook that points to better growth.
TD, Canada’s second largest bank, upgraded its 2012 Canadian GDP forecast by 0.5 today to 2.2%:
The catalyst behind this positive adjustment is an improvement in the near-term environment for the global economy and fi nancial markets, which is expected to pay off in terms of higher world commodity prices, more robust exports and stronger confi dence at home.
They don’t expect BOC rate hikes until Q2 2013 but the market is moving more quickly. The December BAX contract, which is an BOC interest rate derivative, has tumbled since that time, with an equivalent of 20 basis points of hikes priced in. BOC Governor Carney has repeatedly warned about house prices and he will not hesitate to hike as the outlook improves.
The Canadian dollar is not yet reflecting rates that could hit 2.50% by the end of next year (from 1.00% currently).
Technically, USD/CAD has been moribund, stuck in a 200-pip range since late January and trading in an 80-pip range last week. But this period of inactivity could be coming to an end. With spot at 0.9867, the February low of 0.9842 is easily within striking distance. Below that, a move to 0.9700 or 0.9400 seems likely as global growth prospects improve.
The recent choppiness of USD/CAD calls for caution at the moment but selling a break of fresh