Volatility Forecast for USD CAD Exchange Rate on Fed Meeting Minutes

July 5, 2017 - Written by Frank Davies

STORY LINK Volatility Forecast for USD CAD Exchange Rate on Fed Meeting Minutes

With investors awaiting the release of the Federal Open Market Committee’s (FOMC) June meeting minutes the US Dollar Canadian Dollar exchange rate has been trending in a narrow range.

As markets are already pricing in high odds of the Fed opting to raise interest rates again at either its July or September meetings, though, the upside potential of the US Dollar is somewhat limited.

Any indications that policymakers are minded to tighten monetary policy further imminently would keep the USD JPY exchange rate on a more bullish footing, particularly in the wake of the stronger-than-expected ISM manufacturing index.

However, if the Fed appears to be pursuing a less aggressive pace of tightening this could weigh heavily on the appeal of the US Dollar.

Even so, as Kit Juckes, research analyst at Societe Generale, noted:

‘I can’t help thinking though, that tomorrow’s services ISM and Friday’s payrolls will be more important in determining how the market feels about the idea of a further rate hike in 2017, than the Minutes.’

Could US Dollar Strengthen on Bullish Payrolls Report?

Further volatility is likely for USD exchange rates ahead of the weekend thanks to June’s non-farm payrolls report.

As long as the US labour market continues to demonstrate strength the prospect of another Fed interest rate hike is set to remain heightened, especially if wage growth picks up on the month.

On the other hand, any deterioration in this raft of employment data may encourage investors to sell out of the ‘Greenback’ once again.

While general market risk appetite has been somewhat limited, in part thanks to disappointing Chinese data, the US Dollar may struggle to gain any further momentum on the back of safe haven demand in the near term.

Even though domestic inflationary pressure is still somewhat short of the Fed’s desired levels the prospect of another interest rate hike is likely to continue driving demand for the US Dollar in the coming days.

A weaker showing from the ISM non-manufacturing composite index could put something of a dampener on the USD CAD exchange rate, though, if this undermines confidence in the underlying health of the US economy.

BOC Rate Hike Bets Continue to Support CAD

The downside potential of the Canadian Dollar has been limited, meanwhile, thanks to increasing market expectations for the Bank of Canada (BOC) to begin tightening monetary policy.

Despite a slight dip in the latest Canadian manufacturing PMI the odds continue to point towards the BOC raising interest rates from their current lows in the near future.

As the sector remained in a solid state of growth this was not enough to counter recent hawkish commentary from BOC policymakers, preventing the Canadian Dollar from weakening particularly.

However, with Brent crude prices still trapped below the psychologically important US$50 per barrel mark and worries over the global oversupply glut persisting the appeal of the commodity-correlated currency has been somewhat muted.

This offered the USD CAD exchange rate some support, even though the policy divergence between the Fed and BOC looks set to narrow before the end of the year.

Bets on an imminent BOC rate hike could strengthen if Friday’s Canadian labour market data proves positive, offering the Canadian Dollar a fresh rallying point.

A solid showing here could increase market expectations for the BOC’s July policy meeting, improving the outlook of CAD exchange rates further.

Alvin T. Tan, research analyst at Societe Generale, noted:

‘We had maintained that the Canadian Dollar is undervalued, and we had previously expected USD/CAD to trade to 1.30 by early 2018. That target level has now been reached, and the medium-term outlook for the CAD has turned more much bullish given the BoC's hawkish shift. The Loonie’s undervaluation should support further appreciation.’

If the latest US crude stockpiles data points towards a continued build-up in inventories then the oil price is likely to falter once again, potentially dragging on appeal of the Canadian Dollar.

A fresh indication that global oversupply remains an issue could prompt some CAD selling, especially if OPEC nations show signs of increasing oil output as well.

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TAGS: Canadian Dollar Forecasts