Canadian dollar price forecast 10 March 2021

2021-03-10

Bank of Canada takes an early start. Forecast as of 10.03.2021Dmitri Demidenko

The rapid growth of oil and the US economy’s recovery encourage [USDCAD][1] and [EURCAD][2] bears to go ahead. The BoC meeting and the Canadian employment report could serve as signals for opening positions. Let us discuss the Forex outlook and make up a trading plan.

Weekly Canadian dollar fundamental forecast

According to the OECD forecasts, the world economy is ready to grow by 5.6% in 2021. Which of the central banks of the world’s major economies will be the first to normalize monetary policy? The answer to this question is extremely important for financial markets because the tapering of the QE program and the rates’ increase will strengthen the local currency. It becomes a Forex favorite, the fate of the trend becomes clear, and traders have only one thing to do - to buy.

The US economy’s strength and the Treasury yield rally suggest that the Fed will be the first to start normalizing monetary policy. Indeed, according to research by the Federal Reserve Bank of Cleveland, if the Fed had adhered to the old, classical inflation-targeting approach, the federal funds rate in the first quarters of 2022 and 2023 would have increased to 1.01% and 1.55%, respectively. The problem is that Jerome Powell and his team decided to manage average inflation, that is, tolerate its too high values. The Fed claims that it intends to remain passive for a long time. In my opinion, in this case, we can trust the US regulator.

The Bank of Canada, on the other hand, is faced with the problem of excessive QE scales against the backdrop of a booming economy. In the fourth quarter of 2020, Canada’s GDP expanded by 9.6%, while the Bloomberg experts forecast the growth of only 7.3% YoY. In 2021, experts expect the economy to grow by 5.4%, which is higher than the BoC’s January estimate of 4%.

Canada’s GDP dynamics

Source: Bloomberg.

What’s the reason for purchasing assets worth CA$4 billion a week having such good GDP figures? The Bank of Canada’s QE program is already unprecedented among the G7 countries based on the scale of sovereign debt markets, and then the economy is showing substantial growth. The Bank of Canada is unwilling to continue bond purсhases at the same pace amid a reduction in the issue scale. Is the BoC trying to taper QE so as not to reduce its own exports? Canadian exports should experience problems due to the strengthening of the CAD.

In fact, there is no problem. Since the beginning of the year, the oil price has grown by 30%, while the CAD exchange rate has increased by only 0.4% against the US dollar. Canada’s GDP continues to grow due to the oil market, which is on the rise thanks to the booming global demand and OPEC+ reluctance to increase production, and due to the strength of the US economy, which accounts for 76% of Canadian exports. At the same time, the OECD believes that Ottawa will become the second-largest beneficiary of Joe Biden’s $1.9 trillion fiscal stimulus after Washington due to close economic ties between the two North American countries.

The impact of fiscal stimulus on economies

Source: Financial Times.

Weekly [USDCAD][1] and [EURCAD][2] trading plan

In my opinion, the Bank of Canada will decide on the QE tapering on March 10. If it will not happen, then definitely in April. Strong Canadian employment statistics in February will be an additional driver for the decline of the [USDCAD][1] and [EURCAD][2] prices. I recommend selling on the breakout of the supports at 1.2615 and 1.4985.

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 LiteForex. 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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