Canadian Dollar To Consolidate Above 1.02 On More Dovish BoC

By David Song, Currency Analyst

Canadian Dollar To Consolidate Above 1.02 On More Dovish BoC Fundamental Forecast for Canadian Dollar: Bearish

• USDCAD Tests 20 Day Average for First Time Since April
• USDCAD: Correction to Yield Long Entry
• Canada Jobless Rate Unchanged As New Jobs Added in May For Third Month

The Canadian dollar ended the week higher against its U.S. counterpart as the Bank of Canada continued to talk up expectations for a rate hike, and the loonie may appreciate further in the following week should the economic docket instill an improved outlook for the region. After keeping the benchmark interest rate at 1.00%, the BoC reiterated that it ‘may be appropriate’ to start withdrawing monetary support, but went onto say that higher borrowing costs will be ‘weighed carefully’ as the central bank sees a risk of undershooting the 2% target for inflation.

Indeed, the BoC’s Financial System Review highlights the biggest event risk for the week ahead, and we may see the central bank continue to soften its dovish tone for monetary policy as the recovery gradually gathers pace. However, as the record-rise in household indebtedness continues to pose a threat for the region, Governor Mark Carney may try to discourage the rise in private sector borrowing, and the central bank head may continue to push for a rate hike in order to prevent a housing bubble. As a result, it seems as though the BoC is looking to raise the benchmark interest rate to curb lending, and we should see the central bank refrain from a series of rate hikes as the persistent strength in the local currency paired with falling commodity prices continues to drag on price growth. In turn, the BoC may sound more dovish next week, and easing bets for a rate hike may dampen the appeal of the Canadian dollar should the central bank strike a more balanced tone for monetary policy.

According to Credit Suisse overnight index swaps, market participants see the BoC keeping the benchmark interest rate on hold over the next 12-months, and we may see the loonie struggle to hold its ground next week should the central bank soften its rhetoric for a rate hike. However, as the USDCAD fails to maintain the upward trending channel carried over from the previous month, we may see the pair consolidate above the 1.0200 figure, and the exchange rate pair may build a short-term base before making another major move to the upside. – DS

Original Article: http://www.dailyfx.com/forex/fundamental/forecast/weekly/cad/2012/06/09/Canadian_Dollar_To_Consolidate_Above_1.02_On_More_Dovish_BoC.html