BLOG | March 21, 2018

USD/CAD Outlook: Fed Rate Hike and Trump’s Tarrifs

USD/CAD opened last week just above 1.2810, trading lightly before Tuesday’s speech by Bank of Canada governor Poloz, who said that the Canadian economy has room to grow further without creating inflation and that they are obligated to let it go through, meaning that there is no immediate need to raise interest rates. After that USD/CAD climbed and closed at 1.2963.

On Thursday new home sales dropped by 6.5% adding to a previous fall of 14.5%, further weakening CAD, and USD/CAD closed the week at 1.3090.

Events in the coming week

CAD

On Thursday Deputy Governor Wilkins talks in Toronto, her speeches have had big impact on the CAD in the past.

On Friday we will see the inflation figures for February and the retail sales for January. We have seen disappointing inflation figures from the US and EU, a negative reading here could hurt the CAD, consensus is 0.3%, previous 0.7%.

December’s reading for retail sales was -0.8%, a negative surprise, consensus for January is 0.1%.

USD

The Fed announces their rate decision on Wednesday, no one is expecting anything but a rate hike.

But how many more hikes will there be in 2018? The previous dot-plot says three, but many expect to see that go up to four this time. This would have strong positive impact on USD.

There will also be a forecast from the FED and then the first post-decision press conference by chair Powell.

Friday we’ll see home sales and durable goods data, which are likely to have large impact on USD.

Technical Outlook

Last week USD/CAD climbed almost 300 points, but volume was below average, and RSI is close to 70, indicating overbought territory. There may be some profit-taking and a technical pullback is realistic from here, but in the current situation the rate is driven more by fundamental macro-political events, than by technical signals.

Technical levels:
Resistance
1.3460
1.3320
1.3180

Support
1.3000
1.2920
1.2790
1.2665

Fundamental Outlook

It is an understatement to say that currently there is a great deal of uncertainty regarding both the USD and the CAD.

The political situation in the US is hard to read, president Trump seems to have gained new confidence in his own abilities and appear to be breaking away more from the GOP (import tariffs) and aggressively pursuing threats (Stormy Daniels, Andrew McCabe). If he tries to fire Robert Mueller then all bets are off, will the GOP protect Mueller? The uncertainty would almost certainly lead to a massive sell-off in USD.

Trump’s tariffs on steel and aluminum take effect this Friday and he is threatening more, targeted towards China and EU. Who will gain from a trade war? No one of course. And Trump is also talking tough on NAFTA, and a failed NAFTA-deal would hurt CAD a lot more than the USD, at least in the short-term.

The possible Trump/Kim Jong Un meeting in May could reduce tension but could also backfire.
There are plenty of other hotspots that may complicate world politics at any time; Syria, Ukraine/Russia, Saudi Arabia/Yemen/Iran, Israel/Palestine and the South China Sea, to name a few.

Will Fed hike rates 3 times in 2018? Or 4 times? The employment figures are good, but inflation is still not picking up.

The Canadian economy is healthy, 3.1% growth in 2017, and strong employment figures. The economy is predicted to grow just over 2% in 2018, and the bank of Canada is expected to hike rates only twice in the next 12-18 months.
WTI is trading over 62 and appears to be trending up (traded under 43 last June), this will eventually strengthen CAD further.

Possible scenario:

Short-term pullback to 1.2920-1.3000 range, then possibly moving towards 1.3320 on increased uncertainty, but in a medium to long-term perspective I think CAD is undervalued and I can see USDCAD moving below 1.25 again by the end of 2018.

 

Summary
Article Name
USD/CAD Outlook: Fed Rate Hike and Trump's Tarrifs
Description
USD/CAD opened last week just above 1.2810, trading lightly before Tuesday's speech by Bank of Canada governor Poloz, who said that the Canadian economy has room to grow further without creating inflation and that they are obligated to let it go through, meaning that there is no immediate need to raise interest rates. After that USD/CAD climbed and closed at 1.2963.
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ForexTips
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