Home Forex Market Analysis USD/CAD Forecast As Divergence Between Fed And BOC Emerges

USD/CAD Forecast As Divergence Between Fed And BOC Emerges

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USD/CAD Forecast as Divergence Between Fed and BOC Emerges

The USD/CAD pair held steady on Wednesday, even after the relatively hawkish Bank of Canada (BOC) interest rate decision and the dovish Jerome Powell testimony. The pair was trading at 1.2542 on Thursday morning, which was 0.90% above the lowest level this week.

Canada economy booming

The Canadian economy has recorded a strong recovery. On Friday last week, employment data revealed that the country added more than 237k jobs in June. This was a sharp rebound after the economy lost jobs in the previous two straight months as the country implemented some lockdowns. As a result, the country is within range of regaining all jobs that were lost during the pandemic. The unemployment rate fell to 7.8%.

Other numbers have been strong. House prices have risen, while industrial and manufacturing sectors were doing well. Further, the country’s tourism and hospitality sectors are improving as the reopening continues. 

Most importantly, the country has benefited from the rebounding US economy, helped by large stimulus packages and low-interest rates. This is notable since Canada is one of the biggest trading partners of the US. As such, it tends to benefit when the US economy does well. The country will benefit if Biden passes his $1 trillion infrastructure package and the $3 trillion anti-poverty plan.

Crude oil prices have also helped to support the Canadian economy. Brent and West Texas Intermediate (WTI) has risen to more than $74 per barrel. On Wednesday, OPEC+ members agreed on supplies. This could see prices keep rising. As the fourth-biggest oil exporter, Canada benefits from high oil prices.

The divergence between the Bank of Canada (BOC) and the Fed

It is against this backdrop that the BOC held its monetary policy meeting this week. On Wednesday, the bank decided to leave interest rates unchanged, as most analysts were expecting. The bank also decided to slash its monthly asset purchases for the third time since October last year.  The BOC will buy assets at a pace of C$2 billion per month, down from C$3 billion.

As a result, analysts expect that the BOC will end its asset purchases program later this year. The statement also pointed to the fact that it will hike interest rates in 2022.

Therefore, this makes the BOC the second most hawkish central bank in the developed world after the Reserve Bank of New Zealand (RBNZ). On Wednesday, the RBNZ said that it would wind up its quantitative easing policy later this month.

Most importantly, the USD/CAD rose even as a divergence between the Fed and BOC appeared to widen. While the recent data showed that US inflation rose at the fastest pace in more than a decade, Jerome Powell reiterated that the bank would hold on to its policy. In a testimony, he said that he expects inflation will resume the downward trend. 

Therefore, the overall performance of the USD/CAD is likely because investors believe that the Fed will ultimately turn hawkish. Indeed, the most recent FOMC minutes showed that some members were starting to think about tapering.

USD/CAD technical analysis

The four-hour chart shows that the USD/CAD pair fell to a weekly low of 1.2422 after the BOC decision. It then rebounded sharply since the decision was in line with what analysts were expecting.

USD/CAD chart

The pair remained slightly above the 25-day Moving Average and between the middle and upper lines of the Bollinger Bands. USDCAD has also formed the ascending channel (marked in blue). Therefore, the pair will likely keep rising as bulls target the upper side of the channel. 

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