Loonie: strong, but not for long. Forecast as of 09.08.2022

Thanks to a strong economy, aggressive overnight rate hikes and favorable trading conditions, the loonie climbed into second place among the G10. But for how long? Let’s discuss the topic and make up a trading plan for USDCAD, AUDCAD and CADJPY.

Weekly Canadian dollar fundamental analysis

The US dollar has strengthened against all other G10 currencies since the beginning of 2022. However, the reluctance of the greenback price to rise in response to strong US employment data and the FOMC’s hawkish stance are forcing investors to consider competitors. For example, the Canadian dollar, which has many advantages. However, isn’t it a misleading impression?

What could be better for the currency than a strong economy, aggressive monetary tightening and favorable trading conditions? Scotiabank officials believe that according to the above factors, the loonie is ahead of the euro, pound and yen. BMO Capital Markets claims that the CADJPY pair has good growth potential. The Bank of Japan continues its ultra-easy monetary policy, while the Bank of Canada intends to bring the overnight rate to 3% in September. BoC is more active than other major regulators, which theoretically should support the CAD.

Dynamics of central bank rates

Source: Bloomberg.

According to the IMF, Canada’s GDP will outpace its G7 counterparts in 2022-2023. A strong economy means a strong currency. Isn’t that a reason to buy loonie?

G7 GDP forecasts

Source: Bloomberg.

The fall of the Bloomberg commodity index by 13% compared to its high negatively affected all commodity currencies. However, according to Monex Europe, AUDCAD and NZDCAD sales will become profitable. The US economy aids Canada, while China helps Australia and New Zealand. The situation in Asia appears to be worse than in North America.

I have the opposite opinion. I have been praising the Canadian dollar for a long time, but now I have changed my mind. According to the latest Canadian jobs report, employment decreased by 30.6 thousand. The indicator falls for the second month in a row, which confirms the monetary policy of the BoC is more effective than the Fed. The Fed would also like to see the deterioration of the US labor market, which will contribute to a slowdown in inflation. Thus, the Bank of Canada has more reason to reduce the monetary restriction speed than the Fed. The loonie looks more vulnerable than the US dollar.

I do not think the IMF’s optimistic forecasts regarding Canada’s GDP will come true. They are based on the strength of US households, but the fiscal stimulus is running out and the US, Canada’s key market, is having more and more difficulties. China will gradually recover after the lifting of lockdowns.

USDCAD, AUDCAD and CADJPY trading plan for a week

A rally of US stock indices in response to close-to-expected inflation data in the US will make it possible to buy AUDCAD with a target at 0.91. While the CPI acceleration will allow opening USDCAD longs and CADJPY shorts towards 1.3 and 103.

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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