Loonie is back to the game. Forecast as of 08.12.2021

When oil was falling in value, investors ignored Canada’s strong domestic data and the BoC’s willingness to normalize monetary policy. It is time to consider positive factors. Let us discuss the Forex outlook and make up a USDCAD trading plan.

Weekly Canadian dollar fundamental forecast

Currencies of oil-producing countries have been the most vulnerable to the appearance of the omicron. The emergence of a new strain of COVID-19, capable of bypassing vaccines and immune system protection, created a sense of déjà vu. Investors were seriously discussing the possibility of a new pandemic. The previous one led to a 20% drop in global oil demand, which pushed the WTI value below zero at some point. Positive news about the omicron has stabilized the oil market, encouraging the USDCAD bears to go ahead.

The drop in oil price in November pressed the Canadian dollar down. Investors forgot bullish factors, like strong domestic data and the central bank’s plans to normalize its monetary policy. In December, markets remembered about positive drivers for the Loonie, and the USDCAD sank to its three-week lows. Investors are looking forward to the BoC meeting. Tiff Macklem and his colleagues could signal the speed of the interest rate hiking in 2022.

Although the derivatives market doesn’t expect a rate hike in December, it gives a 50% chance that borrowing costs will be increased in January. Furthermore, five rate hikes are priced in the derivatives quotes, suggesting the Bank of Canada interest rate could be up to 1.5%.

Amid a significant improvement in Canada’s economic performance, an ultra-easy monetary policy, including historically low borrowing costs and over CA $400 billion in bonds on the BoС’s balance sheet, is unnecessary. Such a policy only fuels inflation, which already exceeds the upper limit of the 1%-3% range targeted by the central bank for seven months. The Fed has stopped considering high prices transitory, so the BoC could do the same.

Dynamics of Canada’s inflation

Source: Bloomberg

Along with the rapid rise in consumer prices, the labour market recovery and a surge in housing prices are the reasons to tighten monetary policy. In November, the Canadian economy added 153,000 new jobs, which is four times more than predicted by Bloomberg experts. As a result, employment has fully recovered to pre-pandemic levels, and unemployment has come close to those levels.

Dynamics of Canada’s employment


Source: Bloomberg

It would seem that the rise in oil prices and strong domestic data should force the Bank of Canada to safely raise the interest rate. Nonetheless, there are headwinds as well. The situation with omicron has not yet been fully clarified, the Fed did not say its weighty word, and Tiff Macklem promised not to raise borrowing costs before the full recovery of Canada’s economy, which is expected in the second quarter.

Weekly USDCAD trading plan

I suppose the Canadian dollar looks quite promising. Unless the USDCAD bulls draw the price above 1.266, the pair should continue falling towards 1.258 and 1.252. It is relevant to sell the pair.


Price chart of USDCAD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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