Fundamental Forecast for Canadian Dollar: Neutral
USD/CAD[1] holds near the monthly-high (1.3067) as the unexpected contraction in Canada Employment[2] dampens bets for an imminent Bank of Canada (BoC) rate-hike, and the pair stands at risk of making a more meaningful run at the 2018-high (1.3125) especially if the Federal Open Market Committee (FOMC) delivers a hawkish rate-hike next week.
All eyes are on the FOMC[3] interest rate decision scheduled for June 13 as the central bank is widely expected to deliver a 25bp rate-hike, and the fresh updates from Chairman Jerome Powell and Co. are likely to influence the near-term outlook for USD/CAD as Fed officials pledge to phase out the forward-guidance for monetary policy.
Market participants are likely to turn their attention to the Fed’s longer-run interest rate forecast (dot-plot) as the central bank persistently warns ‘that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,’ and a material adjustment to reflect a more aggressive hiking-cycle should boost the appeal of the greenback as households and businesses prepare for higher borrowing-costs.
However, recent comments from the FOMC suggest the central bank is in no rush to extend the hiking-cycle as ‘inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term,’ and minor changes in the Summary of Economic Projections (SEP) may drag on the greenback as market participants scale back bets for four rate-hikes in 2018. As a result, ongoing projections for a neutral Fed Funds rate of 2.75% to 3.00% may produce a near-term correction in USD/CAD
