USDCAD Forecast as the Sell-Off Intensifies

Jan 13, 2022 11:30 AM ET
USDCAD Forecast as the Sell-Off Intensifies

The USDCAD sell-off intensified this week as the US dollar pulled back following the latest American consumer price index (CPI) data. The pair was trading at 1.2500 on Thursday morning, which was about 3.60% below the highest level in December.

BOC and Fed tightening

The USDCAD pair declined sharply as investors started pricing in more tightening by the Bank of Canada (BOC) and the Federal Reserve.

The BOC was the first major central bank to the brink. It initially started tapering its asset purchases in 2020 and accelerated the process in 2021. Economists now believe that conditions are right for the bank to start hiking interest rates.

In a report, analysts at JP Morgan predicted that the BOC will hike interest rates by about 25 basis points in its January 26th meeting. The analysts had previously predicted that the first interest rate hike will happen in April this year. 

The Federal Reserve has also increasingly turned hawkish. In his confirmation hearings this week, Jerome Powell said that the bank was prepared to do whatever it takes to prevent runaway inflation in the country. 

He hinted that the bank will end its quantitative easing (QE) soon and then start a rate hiking cycle. Like with the BOC, analysts are now pricing in about four to five rate hikes this year.

US inflation rising

The USDCAD pair declined sharply after the latest American consumer inflation numbers that were published on Wednesday.

According to the Bureau of Labor Statistics (BLS), the country’s headline inflation rose from 6.8% in November to 7.0% in December. That was the highest figure since 1982 and was driven by the rising food and energy prices. Without the two, inflation rose to 5.4%, which is also above the Fed’s target of 2.0%.

Still, there are signs that the real inflation is significantly higher than the reported one. For example, home prices in the US rose by over 10% in 2021. Rents in most cities also increased as developers took advantage of the rising demand.

However, there are signs that American and the global inflation is nearing its peak. For example, on Wednesday, data from China showed that their CPI and PPI declined sharply in December. This is a notable thing since US imports most of its goods from China.

Crude oil price rising

The USDCAD pair has also retreated because of the ongoing trends in crude oil prices. Brent, the global benchmark, has risen to $85, while the West Texas Intermediate (WTI) has jumped to about $82. These prices were slightly below their highest levels in 2021.

Prices have jumped recently because of the falling American inventories. Data published by the Energy Information Administration (EIA) showed that inventories declined by over 4 million barrels last week. It was the seventh straight week in which inventories have declined.

Oil prices have an impact on the USDCAD price because of the volume that Canada ships to other countries like the United States.

USDCAD forecast

The four-hour chart shows that the USDCAD price has been in a deep sell-off in the past few weeks. The pair’s decline accelerated when it fell below the key support at 1.2600, which was the lowest level on December 8th.

It has also moved below the 25-day and 50-day exponential moving averages (EMA) and the 61.8% Fibonacci retracement level. Therefore, the pair will likely keep falling as bears target the next key support level at 1.2400.

The USDCAD 4-hour price chart

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