Title: Canadian Dollar Forecast: USD/CAD Reverses Near August Low as Oil Rises and Fed Yield Bets Shift
By Matt Weller, FOREX.com
Expanded and adapted version with additional research and insights
Overview:
The Canadian dollar (CAD) has shown notable resilience in recent sessions, supported by surging oil prices and shifting expectations around monetary policy in both the United States and Canada. The USD/CAD currency pair has reversed direction after approaching the August low, signaling a potential trend change fueled by both domestic and international developments.
This article expands on the original insights provided by Matt Weller at FOREX.com, while incorporating additional data and forecasts to offer a more detailed perspective on the USD/CAD outlook. Topics covered include:
– Recent performance of USD/CAD
– Impact of crude oil prices on the Canadian dollar
– Shifting rate expectations for the Federal Reserve and Bank of Canada
– Technical analysis of USD/CAD
– Broader macroeconomic context
– Upcoming events to watch
Recent Performance of USD/CAD:
In the first week of June 2024, the USD/CAD currency pair reversed its upward momentum after retracing close to its August 2023 lows near the 1.3350 support area. This level had previously served as a significant pivot for bulls and bears, and the pair’s inability to break decisively lower has signaled a possible rebound in USD strength, or at least a temporary halt in CAD appreciation.
– USD/CAD recently traded near 1.3350 before rebounding toward 1.36
– The pair is now experiencing resistance around the 1.3600 region, with minor support back near 1.3450
Analysts are watching this channel closely as it may determine the next medium-term trend for the pair, especially as various fundamental drivers are influencing both currencies.
Crude Oil Prices and CAD Strength:
Canada is one of the world’s largest oil producers, and the value of the loonie typically moves in tandem with energy prices. As of early June, oil prices are on an upward trend, reflecting tighter global supply conditions and renewed demand strength.
Key developments in oil markets:
– WTI Crude climbed above $75 per barrel, its highest level since April
– OPEC+ reaffirmed plans to maintain supply cuts through Q3 2024
– A recent drop in U.S. inventories further contributed to bullish sentiment
– Global demand for oil is expected to increase during the summer driving season
Given Canada’s economic reliance on energy exports, rising oil prices are generally bullish for CAD. This relationship has been evident in recent price action, where positive oil momentum has aligned with a stronger CAD across major pairs, including USD/CAD.
Monetary Policy Expectations:
Central bank divergence continues to play a significant role in foreign exchange markets, and the USD/CAD rate is no exception. Notably, the Federal Reserve and Bank of Canada appear to be on divergent paths in terms of interest rate trajectory.
Federal Reserve Outlook:
– Despite sticky inflation readings, markets expect the Fed to hold rates steady through mid-2024
– Recent employment data, including the May Nonfarm Payrolls report, added 272,000 new jobs, beating expectations of 180,000
– The unemployment rate rose slightly to 4.0 percent from 3.9 percent, suggesting a slowly cooling labor market
– Core PCE inflation remains above the 2 percent target, limiting the Fed’s flexibility
Fed funds futures show:
– 65 percent probability of a rate cut in September 2024 (down from 80 percent earlier in the year)
– Only one 25 basis point cut now expected in 2024, compared to two cuts priced in earlier
Bank of Canada Outlook:
The Bank of Canada (BoC) recently became the first G7 central bank to cut rates in 2024, lowering the overnight rate by 25 basis points to 4.75 percent on June 5
Read more on USD/CAD trading.