Fundamental Forecast for Canadian Dollar: Bullish

- Bank of Canada Raises Interest Rates 25 basis points
- Canadian Dollar Sees More Volatility than Direction After Bank of Canada Rate Hike

The Canadian dollar rallied against its U.S. namesake last week, finishing as the third best performing G-10 currencies through Friday’s close. As expected, the Bank of Canada raised its key overnight lending rate twenty five basis points to 0.75 percent in July after becoming the first G-7 country to raise interest rates in June. Despite the initial bounce in the USD/CAD to the upside, price action soon after pared the overnight rally, with market participants guiding the pair to test the 200-day SMA support after they digested the rate hike and subsequent comments. In turn, the pair pushed lower throughout the course of the week, and going forward, we may see the Canadian dollar continue to gather momentum towards pivot support at 1.0316.

During the Bank of Canada rate decision, policy makers stated that they expect economic activity to return to full capacity by the end of next year, which is two quarters later than they expected. The central bank lowered its GDP forecast for this year to 3.5 percent from 3.7 percent, and went onto add that business investment has been held bank by the global outlook. On the positive side, the central bank stated that even at 0.75 percent, the economy will be able to achieve the 2 percent target for inflation. However, the most recent consumer prices for the loonie slowed in June from 1.4 percent to 1.0 percent. Indeed, the reading is under the Bank of Canada’s target for the fourth straight month. One of the main reasons for the decline in inflation is due to the drop in gasoline prices, which fell for the first time since October 2009. At the same time, Canada warned of a slowdown in the global economy, lead by the 16 member euro area, which in turn will cause a pull back in the Canadian economy. With the conclusion of the EU’s stress tests, uncertainty in the global markets remain as a multitude of banks were not tested.

Going forward, CAD traders will shift their focus to economic activity which is expected to advance 0.2 percent in May, while industrial product price if forecasted to climb 0.5 percent. With regards to price action, the USD/CAD may continue its southern journey to test the 100-day SMA for support. This level is of crucial importance in that it coincides with the 61.8 Fibonacci retracement on the 4/21, 5/25 upswing. At the same time, with price action recently breaking below the 200-day SMA, while our speculative sentiment index now stands at 2.169, signaling for further declines, we do not rule out a test towards 1.0300.

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