Canadian Dollar Forecast – USD/CAD Dropping to Key Support
Oil prices are high. Inflationary pressures are beginning to surface on both sides of the border. And the Bank of Canada’s surprise hawkishness may be adding fuel to the fire. But can the Canadian Dollar withstand further pressure? Let’s take a closer look at the most important drivers of the Canadian Dollar’s decline. The first is rising Oil prices. The second is rising inflationary pressures on both sides of the border.
Oil prices are high
The Canadian dollar continues to drop against the US dollar, as the recent dip has led to a bearish trend in the currency pair. This bearish trend could continue into the year 2022, with the average outlook pointing to a drop to 1.2393. The maximum predicted level is 1.2942 on 20/12/2021 and the minimum forecast is 1.2034 on 06/02/2021.
The Morgan Stanley team expects the Canadian Dollar to face the same kind of selling as the Pound did back in early November. This is because the Bank of England left the market at the altar. But the overnight indexed swap markets show that the Canadian benchmark cash rate will rise at a moderate pace through mid-2022 and pivot lower to 92 by the end of 2022. This would be the lowest level since the fall in oil prices in the early part of last year.
Inflationary pressures have surfaced on both sides of the border
The earlier reopening of the U.S.-Canada border and tightening of public health measures in both countries have contributed to the inflationary pressures on both sides of the border. In both countries, consumer demand has recovered faster and is reflected in higher apparel and recreation prices. Recreational costs in Canada have risen by 2.2% over the past year, while in the U.S., they are up by 1.5%.
Global growth and commodity prices have stabilized and supply bottlenecks have eased, but inflationary pressures have been rising on both sides of the border. While long-term inflation expectations are pointing to low rates, structural forces that have held down inflation over the past five decades are fading. For example, the expansion of global supply chains and demographic changes are now starting to raise expectations, which may threaten to anchor long-term inflation expectations.
Bank of Canada’s surprise hawkishness
The recent rally in the Canadian dollar has been cut short by the risk sentiment and USD/CAD is now at 1.2402. The Bank of Canada is widely expected to raise interest rates by 0.50% on April 13 and June 1, a move that is seen as a necessary first step to addressing the nation’s soaring inflation and wage gains. However, the Bank of Canada has raised concerns about inflation and wage gains and has signaled that it may hike rates sooner than originally expected.
The central bank of Canada (BoC) announced it would end its QE program and delay its first rate hike until the middle of 2022, pushing tightening expectations higher. The surprise hawkishness of the Bank of Canada had triggered a two-month rally in the loonie. However, this rally has largely faded since the Federal Reserve began tapering its stimulus program.