Fundamental Forecast for Canadian Dollar: Bullish

The Canadian dollar continued to strengthen against its U.S. counterpart in March, with the USD/CAD slipping to a fresh yearly low of 0.9682, and the loonie may appreciate further over the following week as the economic docket is expected to reinforce an improved outlook for future growth.

Meanwhile, the Bank of Canada held the benchmark interest rate at 1.00% earlier this week in an effort to stem the downside risks for the economy, but went onto say that “the recovery in Canada is proceeding slightly faster than expected” as private sector activity gathers pace. Market participants expect the Bank of Canada to tighten monetary policy further this year as rising commodity prices heightens the risk for inflation, and the USD/CAD is likely to trend lower over the near-term as economic activity in Canada outpaces the recovery in the U.S.

Building permits in Canada are projected to increase another 1.0% in January after climbing 2.4% in the previous month, while housing starts are anticipated to expand at an annualized pace of 173.0K in February following the 170.4K rise in the month prior. However, the biggest market mover is likely to be the employment report due out on Friday, which is expected to show the economy adding another 25.0K jobs in February following the 69.2K expansion in the previous month. In turn, the unemployment rate is forecasted to fall back to 7.7% from 7.8% during the same period, and the slew of positive developments is likely to spark a bullish reaction in the Canadian dollar as the central bank raises its outlook for growth.

According to Credit Suisse overnight index swaps, investors are pricing borrowing costs in Canada to increase nearly 100bp over the next 12-months, and interest rate expectations may gather pace going forward as economic activity improves. As a result, the USD/CAD may break out of its narrow range over the following week, and the exchange rate may work its way back towards the 2007 lows as the loonie continues to outperform against the greenback.

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