USD to CAD Exchange Rate Fluctuates as Both Currencies Bolstered by Central Bank Speculation

May 1, 2018 - Written by Minesh Chaudhari

STORY LINK USD to CAD Exchange Rate Fluctuates as Both Currencies Bolstered by Central Bank Speculation

While rising US Treasury 10-year bond yields helped the US Dollar to Canadian Dollar (USD/CAD) exchange rate to put in solid gains at the beginning of last week, its advance attempts since then have been limited by Canadian Dollar strength. So far this week the pair has fluctuated with an upside bias.

Due to expectations of a strengthening US economy, last week saw USD/CAD climb from 1.2765 to 1.2824. The pair was unable to hold its multi-week-highs of 1.2896 however. This week so far the pair has seen limited advance attempts but generally continues to trend near the week’s opening levels.

USD Continues to Trend Higher on Expectations of Tighter US Monetary Policy

Anticipation of a more hawkish tone at this week’s upcoming Federal Reserve policy decision has kept the US Dollar appealing this week, despite a lack of particularly influential or supportive US data so far.

With the Federal Reserve meeting on Wednesday and key US data due towards the end of the week, markets speculate that the US Dollar could be in for another week of strong performance.

Investors are increasingly expecting that the Federal Reserve will ramp up its plans for 2018 interest rate hikes, due to strengthening domestic inflation and generally solid US ecostats.

The Fed was initially expecting to hike US interest rates three times total in 2018, but analysts suggest the US economy now has room for four interest rate hikes this year – three more than the one already made.

With the Fed looking likely to hike US interest rates much more than other major central bank rivals, the US Dollar has benefitted from perceived monetary policy divergence.

Other US economic indicators continue to look up too. The US 10-year bond yield print has been testing multi-year highs over the past week and analysts believe it could find a stronger foothold soon. According to Koji Fukaya from FPG Securities in Tokyo:

‘The 10-year yield could be able to build a more permanent foothold above 3 percent depending on Friday’s US jobs report. And if the Fed sounds hawkish, the yield would have an even better chance of establishing itself above 3 percent,’

Monday’s US data had little influence on the US Dollar outlook. March’s Personal Consumption Expenditure (PCE) results fell short of forecasts month-on-month, as did the latest pending home sales results and Chicago PMI.

CAD Supported by Hopes for Higher Canadian Interest Rates

While last week saw the Canadian Dollar recoil slightly from weeks of stronger performance, the currency has been able to hold its ground against a strong US Dollar this week so far.

Prices of oil, Canada’s most lucrative commodity, have been strong which has supported the oil-correlated Canadian Dollar. Hopes that North American Free Trade Agreement (NAFTA) renegotiations will go smoothly have boosted risk-sentiment too.

Relatively solid Canadian inflation data has also kept Canadian Dollar investors optimistic. Colin Cieszynski from SIA Wealth Management argued:

‘Canadian inflation is continuing to rise,

That does keep the pressure on the Bank of Canada to raise rates at some point.’

Markets are currently pricing in another Bank of Canada (BoC) interest rate hike by September 2018.

USD/CAD Forecast: Canadian Growth and Federal Reserve Decision Ahead

This week could be pivotal for the US Dollar to Canadian Dollar exchange rate outlook, and it largely depends on how upcoming US news affects Federal Reserve interest rate hike bets.

Analysts perceive Wednesday’s Federal Reserve policy decision meeting and Friday’s US Non-Farm Payroll results as being particularly influential.

The Fed is not expected to make any changes to US monetary policy, but investors will be keeping a close eye on potential shifts in stance from Fed officials.

For example, if the Fed signals that it expects US interest rates to rise at a faster pace than previously expected in 2018, the US Dollar outlook will improve. The outlook will strengthen even further if Friday’s US job data impresses.

As for the Canadian Dollar, it is likely to be influenced by Tuesday’s data including February growth results and April’s manufacturing PMI.

Bank of Canada (BoC) Governor Stephen Poloz will be holding a speech which could also inspire Canadian Dollar trade.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Canadian Dollar Forecasts