USD/CAD: waiting for a rate cut
Canada’s export-oriented economy suffered from the sharp fall in crude oil prices seen in 2014. Annualized Q4 economic growth was above the forecast (+2.4% versus 2% expected), but we have strong doubts that growth will remain so strong in Q1: the effect from lower oil prices hasn’t filtered through the economy yet. GDP growth was driven mostly by inventories. It means that production goes on, but demand for the goods is down. The country posted its largest trade deficit since 2012 in January.
In this environment we expect another Bank of Canada rate cut to follow in the coming months. Regulator left interest rates unchanged in March at 0.75% after cutting by 0.25% in February. Clearly, the BOC monetary policy will depend on the energy markets. According to the most recent Goldman Sachs forecast, crude prices will remain under pressure in spring on the back increased supply. Dovish BOC expectations contrast with the hawkish Federal Reserve: the US central bank is likely to deliver a rate hike in summer 2015.
From the technical viewpoint, USD/CAD faced resistance at 1.2626 – this is the upper border of the medium-term bullish triangle. The current pullback is a good time to buy the pair on dips around 1.2550, targeting 1.2800 and 1.3000.
Chart. Daily USD/CAD