By FXEmpire.com
USD/CAD Monthly Fundamental Forecast April 2012
Outlook and Recommendation
Investor sentiment indicators are bullish the USD/CAD is currently trading at 0.9971.
For the month of March see the table below for the trading range:
Since the end of January, the Canadian dollar (CAD) has been stuck in a tight 210 point range (0.9949 to 1.0160) and on a year-to-date basis has been a mid-performer.
The dominant factor driving the North American currency forecast is the outlook for the US economy (and employment) in addition to oil prices, central bank policy and shifts at the long end of the US Treasury yield curve. The US dollar (USD) is supported by an improving economic backdrop, flows into US securities markets and a weakening outlook for both the yen and euro; however, US central bank policy and elevated oil prices are significant weights against the USD. There are three major themes currently driving CAD:
1) high oil prices;
2) loose global central bank policy juxtaposed against the Bank of Canada’s neutral stance; and
3) the outlook for US and Chinese growth.
Europe remains a important driver, but is impacting CAD more in how global central banks are reacting as opposed to headline risk that was the theme in late 2011. CAD continues to exhibit a pattern in which it rises less than its more volatile peer currencies in periods of risk appetite, and sees a lesser degree of decline in periods of risk aversion. Technicals are less important in range-bound environments, and so we turn to fundamentals for the outlook for CAD. Given Canada’s strong ties to a moderately improving economic outlook in the US, elevated commodity prices and the reduction of tail risks in global financial markets that has dampened volatility, CAD should be strong. In addition, the recent release of the federal budget is also CAD positive, given that the government is expected to eliminate its fiscal deficit by the middle of the decade.
Canada’s top credit rating serves it well given the narrowing universe of AAA rated sovereigns, and central bank reserve data suggests that portfolio investment in CAD-denominated assets is an ongoing trend. Sentiment indicators see investors maintain a net long CAD position that has held since early February, and one that remains the third largest long against the USD, where most of the other majors are held net short. However, the Canadian real estate sector and household balance sheets are risks as is the disappointing string of recent domestic data. Overall, we expect that the continued economic expansion in North America, a soft landing in China,. Key risks include: a rapid decline in European growth, contagion into Spain or Italy, evidence of a hard landing in China or a suddenly hawkish Federal Reserve, however these are risks and not part of our base case. We see the CAD rising to trade at 1.00-1.02
Central Bank
The Bank of Canada -BOC INTEREST RATE DECISION
Previous: 1%
BoC Interest Rate Decision is announced by the Bank of Canada. If the BoC is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the CAD. Likewise, if the BoC has a dovish view on the Canadian economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative, or bearish.
FED INTEREST RATE DECISION
Previous: 0.25%
The Board of Governors of the Federal Reserve announces an interest rate. This interest rate affects the whole range of interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers. It also tends to affect the exchange rate. Generally speaking, if the Fed is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the USD.
Originally posted here
