A  Bullish future for the USDCAD

A Bullish future for the USDCAD

By: Darryl Frankfort | Where To Trade | On:3-10-2014 05:55
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Key Highlights

  • A dovish Bank of Canada
  • Inflation within target
  • Sluggish recovery  a major concern
  • Low interest rate unchanged

USDCAD

The USDCAD has been on has been on a long term uptrend since August of 2009. This uptrend persisted even in the face of a weak US economy and a loose monetary stance by the US FED. A weak Canadian dollar has seen the pair move from the lows of 0.9400 in 2011 to levels above 1.1100 in 2014. 

In the last quarter, the USDCAD exchange rate appreciated by over 500 pips. This adjustment can be attributed to the rebound being experienced in the US economy and the loose monetary policy of the Bank of Canada.

 

A  Bullish future for the USDCAD

The 12-month change in the Consumer Price Index

Inflation has been rising steadily in Canada since the Q2 of 2013. Right now, the inflation targets are in sight yet monetary policy of the BOC remains very accommodative because of a slow recovery. The bank targets a mid-point between 1-3% inflation and in august the total CPI was reported to be at 2.1%.  Nonetheless, the BOC has lately taken a cautious attitude towards its approach. The Canadian economy has had a dismal recovery story and this is serving as a major reason for bears to be short the USDCAD.

 A major area that markets look at is the employment situation in Canada. Canada created 11.0K jobs in August compared to 41,5K jobs in May. To put thing in perspective, Canada, actually has had a relatively steady unemployment rate at around 7%.   Last month the unemployment rate was unchanged from August’s 7% figure. However fulltime employment decreased by 11,000 jobs. Meanwhile, jobs at the private sector dropped by record 111,800 jobs. Self-employment on the other hand rose. An increase in part time employment is seen as a “symptom of slack” in the economy. It is part of the reason why the Bank of Canada maintains its loose stance on monetary policy.

The Canadian GDP is expected to average about 2.25% between 2014 and 2016. However the 0.0% growth month over month figure posted in August is quite disappointing. Experts expected a 0.2% growth. This 0.0% reading is well below the Julys growth at 0.3% and this saw the US dollar appreciate against the CAD.

 Sentiments from the bank have termed the recovery from the global financial crisis as “underwhelming”. With its low interest rates, 1.0% there is not much more the bank can do with the conventional policy tools. Carolyn Wilkins the BOC’s Senior Deputy Governor indicated that a monetary stimulus to the economy is needed to return it to a sustainable growth path within the banks inflation targets.

In the US on the other hand the greenback is strengthening as expectations of a rate hike in 2015 increase. The US economy has rebound strongly and this has seen the dollar strengthen against all other major currency.

 

Wrap up

The Canadian recovery story has not been concluded. There is still a long way to go before we reach the pre-crisis levels in all the major sectors of the economy. The BOC is keeping its interest rates low in order to stimulate economic activity. Sentiments from the bank indicates that the bank is considering a monetary stimulus for the economy all these factors add to a bearish outlook for the CAD.

 Paired with a bullish dollar, we are bound to see the exchange rate go even higher. A great trading approach under these conditions is to maintain a bullish bias on your USDCAD medium and long term trades.

 

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