The USD/CAD pair fell to 1.2430 levels on Wednesday from a high of 1.2662 levels seen on Tuesday as markets believe the Bank of Canada would not cut interest rates in the next meeting.
The pair is likely to extend losses to 1.2275 levels by Friday as –
1. Rate cut bets continue to unwind – The CAD should continue to gain against the USD as markets unwind interest rate cut bets ahead of the BOE meeting next week. The BOC governor Ploz said on Tuesday that the bank would like to see the effect of the latest interest rate cut announced in January, triggering speculation that the bank would take a “pause’ in the next week. On the other hand, the dovish testimony by Fed chair Janet Yellen has pushed the rate hike expectation in the US far out in Q4 2014. Hence, the CAD is likely to get a double boost from divergent short-term monetary policy expectations.
2. Stability in Crude prices – The April WTI Crude futures have stabilized around USD 49.54/barrel today, even though the API data released yesterday showed Crude oil inventories rose by 8.9 million barrels in the week ended Feb. 20, beating the estimate of 3.7 million barrels. The resilience in Crude indicates markets may not react much to the DOE data due for release today. In fact, the doors are open for an up move in crude prices if the DOE data surprised by showing a comparatively less build up of crude stocks in the US. Thus, CAD stands to gain.
3. Weak US data expected – The US CPI in January is seen falling 0.1% year-on-year in January from 0.8% seen in December. Meanwhile, the Q4 GDP rate is expected to slow down to 2%, from the previous estimate of 2.6%. The 10-year yield has already weakened to trade below 2%. A weak inflation and growth numbers could drag down the yields to below 1.9% and weaken the US dollar. Meanwhile, the Canadian inflation rate is slowing down to 0.8%, from 1.5%. However, it is expected to stay in positive territory as opposed to the expectation of a negative print in the US.
On Technical charts, the CAD failed to rise above the falling trend line on the daily charts and has extended losses to trade below the 5-DMA and 10-DMA. By the weekend the pair could drop to the 50-DMA seen at 1.2280. The bearish view is at a risk of a sharp fall in Crude prices.However, the reaction to the API data has been muted. Furthermore, weakness in USD could provide support to Crude prices and help CAD gain strength on unwinding of interest rate cut bets.
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