Fundamental Forecast for Canadian Dollar: Bullish

Increased bets for higher borrowing costs in Canada pushed the loonie to a fresh yearly high on Friday, and the bullish sentiment underlying the commodity currency is likely to drive the USD/CAD lower in the week ahead as investor confidence improves. The dollar-loonie slipped to 0.9625 during the first day of trading in April as the U.S. non-farm payrolls report encouraged an improved outlook for Canada’s export market, and the exchange rate should continue to push lower over the near-term as it trades within the downward trending channel carried over from 2009.

As the recovery in the U.S., Canada’s largest trading partner, gradually gathers pace, BoC Governor Mark Carney may continue to raise the outlook for growth and inflation, and the central bank may show an increased willingness to tighten monetary policy further this year as it aims to balance the risks for the region. According to Credit Suisse overnight index swaps, investors speculate the BoC to lift the benchmark interest rate by nearly 75bp over the next 12-months, and interest rate expectations may continue to accelerate in the week ahead as growth prospects improve. As economic activity expands for the fourth consecutive month in January, the fundamental calendar for the following week is expected to show a rebound in business sentiment, while employment is expected to increase another 29.0K in March following the 15.1K expansion in the month prior.

However, BoC Deputy Governor Jean Boivin warned that the economy “still faces major difficulties” while delivering a speech earlier this week and said that the central bank must maintain “room to maneuver” as the outlook for the global economy remains clouded with high uncertainty. As the BoC continues to talk down speculation for higher borrowing costs, the USD/CAD may consolidate going into the following week, but a marked expansion in employment paired with a large rebound in business confidence could stoke increased demands for the Canadian dollar as investors expect to see higher interest rates this year.

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