Fundamental Forecast for Canadian Dollar: Bullish

The Canadian dollar continued to outperform against its U.S. counterpart, with the USD/CAD slipping to a fresh yearly low of 0.9453, and the exchange rate may persistently retrace the advance from back in 2007 as economic activity in the region outpaces the recovery in the world’s largest economy. As growth and inflation accelerates, with consumer prices advancing to a 30-month high of 3.3% in March, speculation for higher borrowing costs in Canada could lead the dollar-loonie to make a run at 0.9000 over the near-term, and the small correction coming off of the holiday trade is likely to be short lived as the pair maintains the downward trend dating back to 2009.

Market participants are pricing borrowing costs in Canada to increase by nearly 100bp over the next 12-months according to Credit Suisse overnight index swaps, and the heightening risk for inflation is likely to boost speculation for a rate hike in the second-half of the year as price growth exceeds the Bank of Canada’s forecasts for a 3.0% print by June. In turn, the central bank may look to toughen its stance against inflation and Governor Mark Carney may drop his pledge to ‘carefully consider’ future rate hikes as the board maintains its dual mandate to ensure price stability while fostering full-employment. However, as the economic docket for the following week is expected to show the growth rate expand at a slower pace in February, the GDP report could bear down on the exchange rate, and the BoC may retain its wait-and-see approach over the coming months as the mark appreciation in the local currency dampens the outlook for future growth. As a result, the near-term correction in the USD/CAD may gather pace going into the last days of April, which could produce a test of the 20-Day moving average at 0.9622 as the relative strength index continues to come off of its recent lows.

As the DailyFX Speculative Sentiment Index currently stands at 3.71, with retail currency traders eagerly trying to catch the bottom of the USD/CAD, the contrarian indicator continues to point to lower prices for the dollar-loonie, and the bullish momentum underlying the Canadian dollar should gather pace over the near-term as investors increase their appetite for risk.

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