Canadian Dollar Talking Points
USD/CAD trades to a fresh monthly low (1.2789) as it carves the series of lower highs and lows following the Federal Reserve interest rate decision, and fresh data prints coming out of the US and Canada may influence the near-term outlook for the exchange rate amid the ongoing shift in monetary policy.
Fundamental Forecast for Canadian Dollar: Neutral
USD/CAD depreciates for the second week as the US Gross Domestic Product (GDP) report shows the US economy in a technical recession, and the weakening outlook for growth may continue to produce headwinds for the Greenback as it puts pressure on the Federal Open Market Committee (FOMC) to winddown its hiking cycle.
Nevertheless, the update to the Non-Farm Payroll (NFP) report may encourage the FOMC to deliver another 75bp rate hike at its next interest rate decision on September as the economy is anticipated to add 250K jobs in July, and a positive development may curb the recent decline in USD/CAD as it raises the Fed’s scope to implement a highly restrictive policy.
At the same time a rebound in Canada Employment may influence USD/CAD as the Bank of Canada (BoC) decides to “front-load the path to higher interest rates,” and an improvement in the labor market may lead to a kneejerk reaction in the exchange rate with both central banks on track to further adjust monetary policy over the coming months.
Until then, USD/CAD may struggle to hold its ground as it carves a series of lower highs and lows, but another unexpected contraction in Canada Employment may produce a bearish reaction in the Canadian Dollar as it curbs speculation for another 100bp BoC rate hike.
With that said, USD/CAD may continue to depreciate as it trades to fresh monthly lows at the end of July, but fresh data prints coming out of the US and Canada may sway the near-term outlook for the exchange rate amid the ongoing shift in monetary policy.
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong