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Canadian Dollar Talking Points

The USD/CAD currency pair looks to trade at a fresh monthly low (1.2789) as it carves the series of lower highs and lows following the Federal Reserve interest rate decision. Fresh data prints coming out of the US and Canada may influence the near-term outlook for the exchange rate amid the ongoing shift in monetary policy.

Fundamental Forecast for the Canadian Dollar: Neutral

The USD/CAD pair depreciates for the second week as the US Gross Domestic Product (GDP) report shows the US economy in a technical recession, and the weakening outlook for growth may continue to produce headwinds for the greenback as it puts pressure on the Federal Open Market Committee (FOMC) to wind down its hiking cycle.

Nevertheless, the update to the Non-Farm Payroll (NFP) report may encourage the FOMC to deliver another 75 bps rate hike at its next interest rate decision on September as the economy is anticipated to add 250 thousand jobs in July. A positive development may curb the recent decline in the USD/CAD pair as it raises the Fed’s scope to implement a highly restrictive policy.

At the same time a rebound in Canada Employment may influence USD/CAD as the Bank of Canada (BoC) decides to “front-load the path to higher interest rates.” An improvement in the labor market may lead to a knee-jerk reaction in the exchange rate with both central banks on track to further adjust monetary policy over the coming months.

Until then, the USD/CAD pair may struggle to hold its ground as it carves a series of lower highs and lows. Yet another unexpected contraction in Canada Employment may produce a bearish reaction in the Canadian dollar as it curbs speculation for another 100 bps BoC rate hike.

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