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USD/CAD. QE prospects at stake: Canadian dollar on hold

The Canadian dollar, against the US currency, lost almost 500 points in June. The hawkish results of the last Federal Reserve meeting deprived the USD/CAD bears of a key advantage, thanks to which the loonie gradually but consistently strengthened over two months - from mid-April to mid-June. The pair plunged to the bottom of the 20th figure, but did not test the major support level at 1.2000. The bears were unable to repeat their spring success when the price renewed its multi-month low, standing at 1.1705.

The locomotive of the downward movement of the pair until the June Fed meeting was the hawkish position of the Bank of Canada. Let me remind you that back in April, the Canadian central bank reduced the volume of the asset repurchase program by 1 billion, while revising its forecast regarding the timing of the rate hike. Members of the central bank admitted that such a decision could be made in the second half of next year. At the last (June) meeting, the central bank made it clear that it is ready to move further towards the normalization of monetary policy. At the same time, at that time (at the beginning of June), most members of the Federal Reserve were lobbying for the idea of preserving the accommodation policy. This uncorrelation provided background support for the Canadian dollar against the US dollar.


However, after the announcement of the results of the June Fed meeting, the fundamental picture has changed dramatically. The Fed has stepped up its rhetoric and released an updated point forecast that the interest rate will be raised twice in 2023. Against the background of such intentions, the greenback strengthened its positions throughout the market, including in tandem with the loonie, having strengthened by almost half a thousand points.

As you know, dollar bulls did not rest on their laurels for long: commenting on the updated point forecast, the Fed chairman in Congress said that it should be treated with "a great deal of skepticism", given that it "does not always come true." In addition, Fed Chairman Jerome Powell was rather vague in his comments on the fate of the incentive program. According to him, the members of the central bank want to first see "significant progress" in the economy - and only then start discussing the issue of winding down QE. According to most experts, members of the central bank will start discussing this issue no earlier than September.

Thus, in the "bottom line" the dollar has lost its "indisputable" advantage, which was based on the uncorrelation of the positions of the Fed and the Bank of Canada. So, despite all the hawkish declarations, the prospects for a Fed rate hike are too distant (while the key indicators should show positive dynamics), and the fate of QE is still vague. At the same time, the Canadian central bank can take another step towards normalizing monetary policy already at the July meeting (or announce a corresponding decision for September). In this context, the loonie still has a definite advantage. Distant and vague prospects for a tightening of the Fed's monetary policy against the background of very specific plans to correct the stimulus program in Canada by the end of this year.

This disposition increases the role of key macroeconomic reports - primarily Canadian ones, since in 2 weeks - July 14 - the next meeting of the Bank of Canada will take place, at which Tiff Macklem may announce the adjustment of QE.

The release of data on the growth of Canadian inflation, published on June 16, supported the loonie: the consumer price index was in the green zone, exceeding the forecasted values. In particular, in annual terms, the general CPI came out at around 3.6% - this is a record growth rate since 2011. The core CPI also broke a multi-year record, climbing to 2.8%. If the data on GDP growth in Canada (which will be published on Wednesday) is also released in the "green zone", the loonie may significantly strengthen its position in the entire market.

Moreover, the preliminary forecasts suggest a rather weak result. According to most analysts, in April, the volume of Canadian GDP will decline by 0.8% (on a monthly basis) and grow to 2.8% - on an annualized basis. As you can see, the overall forecast is rather weak, while some indirect economic indicators suggest that the release may exceed analysts' expectations. Any "positive deviation" of the release will be in favor of the loonie, especially against the background of the greenback's uncertain positions.


Technically, the USD/CAD pair failed to break through the resistance level of 1.2340 (the upper border of the Kumo cloud on the daily chart), remaining in the range of 1.2270-1.2340. Trend indicators are still "silent" and do not show any clear signals. The pair's traders are clearly frozen in anticipation of the key releases of the current week, the first of which will be published the day after tomorrow. In my opinion, the fundamental picture is gradually emerging in favor of the Canadian dollar, given Powell's dovish position and the hawkish intentions of the Bank of Canada. Therefore, we can consider selling from current positions, with the first target at 1.2270 - this is the lower border of the price corridor, within which the pair has been trading throughout the last week.

The material has been provided by InstaForex Company -