USD/CAD Forecast: Canadian dollar tests 1.32, U.S consumer inflation next

It’s been an excellent week for the Canadian dollar, and the currency has posted slight gains on Friday. In the North American session, the pair is trading at 1.3215, down 0.16% on the day. On the release front, there are no Canadian events. Investors are bracing for weak inflation numbers out of the United States. CPI is expected to drop to -0.1%, while Core CPI is forecast to remain steady at 0.1%.

The Federal Reserve is sounding much more dovish of late, after a hawkish rate statement in December sent equity markets plunging. The minutes from that meeting noted that low inflation levels meant that the Fed could “afford to be patient about further policy firming”. Even more striking, the minutes revealed that at the December meeting, some policymakers opposed a rate hike, arguing that inflation was too low to warrant higher rates. The U.S. dollar responded on Wednesday with broad losses. On Thursday, Fed Chair Jerome Powell said he was “very worried” about the massive U.S. debt and reiterated that the Fed would remain patient on monetary policy. Given that further interest rate hikes would hurt the debt burden of corporate borrowers, Powell’s remarks on the debt could be a sign that the Fed will take a pause on rate hikes in the near future.

The U.S. dollar’s retreat continued on Wednesday, after the release of the FOMC minutes of the December meeting. At the meeting, the Fed raised rates for a fourth time in 2018, culminating a very aggressive stance. This was reflected in the rate statement, but then came the thumbs-down from investors, who wanted a more dovish approach, and sent the equity markets into a tailspin. Fed policymakers have since made a sharp U-turn and are sounding much more cautious about future rate hikes. The minutes noted low inflation meant that the Fed can “afford to be patient about further policy firming”. Even more striking, the minutes revealed that at the December meeting, some policymakers opposed a rate hike, arguing that inflation was too low to warrant higher rates. The new dovish stance from the Fed has relieved investors and helped stabilize the stock markets, but has hurt the U.S. dollar, with some analysts predicting a cut in rates late this year.

The Bank of Canada held the benchmark rate at 1.75% on Wednesday, where it’s been pegged since October. The bank policy statement was somewhat on the dovish side, as policymakers highlighted their concerns for the economy. These included low oil prices, an overpriced housing market and the global trade war. The Canadian economy is highly dependent on exports, and a weaker global economy has put a crimp in the export sector. The Canadian dollar had a dismal 2018, falling 8.4%. However, it’s been a stellar January for the currency, which has jumped 3.0%, recovering the losses seen in December. The loonie is sensitive to the movement in equity markets, and higher risk appetite has boosted the currency. The BoC remains cautious, and is likely to hold off on interest rate hikes until the current turmoil in the equity markets eases.

USD/CAD Fundamentals

• 8:30 US CPI. Estimate -0.1%

• 8:30 US Core CPI. Estimate 0.2%

• 14:00 US Federal Budget. Estimate -8.08B

Open: 1.3235 High: 1.3245 Low: 1.3183 Close: 1.3215

USD/CAD Technical

USD/CAD posted  slight losses in the Asian session. In European trade, the pair posted headed lower but has recovered

• 1.3200 was tested earlier in support and remains a weak line. It could break in the North American session

• 1.3290 is the next resistance line

• Current range: 1.3200 to 1.3290

Further levels in both directions:

• Below: 1.3200, 1.3125 and 1.3049

• Above: 1.3290, 1.3383, 1.3461 and 1.3552