Canadian Dollar Forecast: USD/CAD Eyes Major BoC, US CPI Risks

By Justin McQueen of DailyFX

Tuesday, July 12, 2022 7:28 AM EST

Aggressive BoC Hikes are incoming as the inflation outlook continues to deteriorate. Meanwhile, the commodity-exposed economy has been comparatively more resilient than its US counterparts with employment also at record levels. In turn, the BoC’s announcement last month that it would act “more forcefully” to tame inflation pressures suggests the Bank of Canada will follow in the footsteps of the Federal Reserve a hike the bank rate by 75bps.

Alongside this, with the MPR also in focus, the BoC will likely remain very hawkish in their statement and signal that a 75bps hike is on the table at the September meeting. As such, this would be in line with market pricing which currently prices in 146bps of tightening at the next two meetings.

That being said, on the USD side of the equation, the next 24hrs will see the release of the latest US inflation numbers, which as we saw last month will have a key bearing on the near-term price action across markets.

Yesterday, the White House Press Secretary stated that Wednesday’s release will see be “highly elevated” and thus traders are positioning for an upward surprise. A reminder that last month, the White House Press Secretary expected inflation numbers to be “elevated”, which subsequently saw the headline rate at 8.6% vs 8.3% expected. This week, the headline is forecast to rise 8.8%. The question is, does a highly elevated mean of 8.8% or a 9% print, both in reality are highly elevated numbers, when compared to prior. However, from a trading point of view, they can lead to a different market reaction with an in-line print, likely to see the USD edge lower with USD/CAD being the best way to express lower USD, while a 9% print favors another leg higher in the greenback.

From a technical perspective, the path of least resistance is higher USD/CAD, with no alternatives to the USD currently. Unless you are trading the crosses like NZD/CAD or EUR/CAD, I expect the CAD to continue to strengthen again. So far, USD/CAD has spent very little time above the 1.3000 handle, stalling at 1.3080-90, marking the May, June, July highs. However, dips have been well supported in light of the recent pullback in the commodity complex. That said, should we see a turn in the USD, this would be better expressed through lower USD/CAD.