Interest Rates

There are many forecasters who are looking for the Bank of Canada to raise interest rates up from 4.5% at its June meeting but we think this is unlikely.  The Governing Council has noted that current borrowing costs are restrictive enough to bring inflation down to their 2% target level. We expect the Bank of Canada to hold. On the other side of the pair US rates are at 5.00% and the Fed could also hike at their next meeting.

The Big Fundamentals Point to USD Strength

Interest rates aside the quote below is an excellent one in terms of the big fundamentals which will push the USD up on the CAD and all commodity currencies:

“Global economic stagnation, even a potential recession, might be the dominant narrative for the rest of 2023 given recent disappointing economic data and the uncertain US economic outlook due to monetary and credit tightening, as well as debt ceiling fears. This backdrop, coupled with a sluggish recovery in China, and cyclical headwinds keeping commodity prices in check, has led many FX clients to prepare for stagnation or a downturn. Historically, such periods often lead to underperformance in pro-cyclical currencies (like those of commodity and manufacturing exporters) and better performance of safe-haven currencies like the USD.” (CREDIT AGRIOLE)

This is a huge bullish fundamental as the global economy could face a recession.

Crude Oil Weakness to Weigh on the CAD

OPEC recently cut production to boost prices as demand is falling but if we look at the crude oil chart below even with the production cut crude looks weak and, in our view, will target the 40.00 level.

Technical Analysis

We expect crude to move up to the 1.3800 level and then follow on to monthly resistance at 140.00 – Our view of the key technical levels to key off in terms of buying the USD are outlined below.