Falling oil prices are weighing on the loonie, given Canada’s status as a major oil-exporting economy. The trade war with the US is slowing Canadian economic growth and making the Bank of Canada more cautious about monetary policy. The BoC has little incentive to follow the Fed’s lead, further supporting the USD/CAD. Let’s examine these factors and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Falling Brent crude prices are pressuring oil-exporting currencies.
- The trade war with the US is weighing on Canada’s economy.
- Widening monetary-policy divergence is adding further pressure on the loonie.
- Long positions can be opened with targets of 1.4170 and 1.4235.
Weekly Fundamental Forecast for Canadian Dollar
Falling Brent crude prices, an escalation in the trade conflict with the US, and the Bank of Canada’s reluctance to follow the Fed with further rate hikes have turned the Canadian dollar into one of the Forex market’s underperformers. Some carry traders are even considering the loonie as a funding currency, alongside or instead of the Japanese yen and Swiss franc. Meanwhile, the USD/CAD has climbed to around its two-month highs, reaching both bullish targets.
USD/CAD Rate and Brent Price
Source: Trading Economics.
Saudi Arabia’s faster-than-expected restoration of traffic through the East-West pipeline, with a capacity of around 7 million bpd, has added to downward pressure on Brent crude. Flows resumed well ahead of the previously expected seven-week timeline, while renewed hopes for a diplomatic resolution to the conflict in the Middle East have further eased supply concerns. Brent prices have consequently declined in six of the past seven trading sessions. As a result, currencies of oil-exporting countries have come under pressure, and the Canadian dollar is no exception.
However, the biggest source of pain for USD/CAD bears is the growing risk of an economic slowdown and the Bank of Canada’s reluctance to raise interest rates. According to Governor Tiff Macklem, the trade conflict with the US is not having a significant impact on GDP for now. However, he warned that a further escalation could cause business difficulties to intensify and weigh more heavily on economic activity. Tensions are clearly mounting.
Ottawa is seeking alternative export markets in an effort to reduce its reliance on the US, with Europe and India emerging as potential destinations. At the same time, Donald Trump has suggested that the EU’s intention to make Canada an associate member could be viewed as a hostile gesture, potentially prompting higher tariffs on European goods. Meanwhile, the US president has ordered that Canadian goods be excluded from government procurement and directed purchases of potash fertilizer toward Belarus rather than Canada.
Against this backdrop, further monetary tightening by the Bank of Canada would risk delivering an additional blow to an already challenged economy. Macklem said that, at its October meeting, the BoC would consider whether to raise the overnight rate or leave it unchanged.
BoC Interest Rate and Inflation Rate
Source: Trading Economics.
Both supporters and opponents of further monetary tightening have their arguments. Hawks point to consumer prices, which have remained near the upper end of the Bank of Canada’s 1–3% target range for the past four months. Doves point to the slowdown in core inflation as evidence that underlying price pressures are easing.
Trade and geopolitical uncertainty could further complicate the Bank of Canada’s policy decisions. The BoC’s reluctance to tighten monetary policy could leave the loonie vulnerable to further weakness.
Weekly USDCAD Trading Plan
With the previously identified targets for long positions on the USD/CAD now reached, it makes sense to stick with the existing strategy and look for opportunities to buy the pair on pullbacks. The next upside targets are 1.4170 and 1.4235.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDCAD in real time mode
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