© Richard Franulovich
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It has been trading between roughly between 0.98 and 1.01 for the better part for more than 2 months now. There is no particular strong up or down trend in USD/CAD for the time being. However, I do think that there are risks that USD/CAD breaks down towards 0.97 in the coming weeks on the ground that the U.S. fiscal cliff has been averted and data on Canadian jobs and business sentiment was better than expected. In addition to that, I think the Bank of Canada is arguably falling behind the curve and may adopt a more hawkish bias on its monetary policy.
Currently some of the FOMC policymakers consider ending QE in 2013. If that happens, how do you think USD/CAD will react?
The prospect that the Fed ends its asset purchases sooner than expected is a very bullish signal for the Dollar, and thus USD/CAD will see a big bounce. Although, the FOMC minutes released on Thursday talked about ending the asset purchases earlier, we do not believe that is going to happen. Several Fed members who urged to end policy easing by mid-2013 are well-known hawks, but they are not voters. When it comes to the Fed, the key is to focus on the main decision makers like Janet Yellen, Ben Bernanke and others, and they remain dovish as ever. Hence, I expect the Fed to keep easing through most of 2013. Consequently, the Dollar will rise across the board and USD/CAD will advance, if the Fed ends easing early, but I do not think that is a realistic prospect.
What is your short term outlook for USD/CAD, let's say for the end of this week?
For the end of this week I see a risk of USD/CAD breaking down to 0.9775 on the idea that we are getting some better data out of Canada, and there are risks that the Bank of Canada will have to start to move to a more hawkish bias. Moreover, I expect the Euro to hold above 1.30 and that should be a positive signal for the Canadian Dollar.
What is your outlook for the end of the first quarter? What will be the main drivers which will determine pair's performance?
I expect USD/CAD to trade down towards 0.9650, but the caution here is that through February we have to deal with U.S. debt ceiling, which is a pretty significant risk-off catalyst. I think during this period of time USD/CAD is probably going to drift higher, but I anticipate that the debt ceiling would be resolved late February-March. That would be risk-on signal for USD/CAD, which could trade down to 0.9650 by the end of the quarter.