Canadian Dollar Outlook Hinges on Bank of Canada (BoC) Rate Decision

Canadian Dollar Talking Points

USD/CAD gives back the rebound from the start of the month as the weaker-than-expected US Non-Farm Payrolls (NFP) report drags on the Greenback, and the Canadian Dollar may continue to outperform its US counterpart if the Bank of Canada (BoC) unveils a less dovish forward guidance for monetary policy.

Fundamental Forecast for Canadian Dollar: Neutral

USD/CAD appears to be unfazed by the 68.0K decline in Canada Employment as it pulls back from a fresh weekly high (1.2133), and it remains to be seen if the BoC will react to the fresh data print as job growth contracts for the second straight month.

Keep in mind, the BoC tapered its quantitative easing (QE) program at the April meeting as the central bank upgraded its economic forecast, and it seems as though the Governor Tiff Macklem and Co. slowly shift gears over the coming months as “decisions regarding further adjustments to the pace of net purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery.”

As a result, more of the same from the BoC may shore up the Canadian Dollar as “the Bank now forecasts real GDP growth of 6 ½ percent in 2021, moderating to around 3 ¾ percent in 2022 and 3 ¼ percent in 2023,” and the central bank may gradually adjust the forward guidance in the second half of the year as officials expect inflation to “return to 2 per cent on a sustained basis some time in the second half of 2022.”

However, the Canadian Dollar may face headwinds if the BoC responds to the recent weakness in the labor market, and USD/CAD may attempt to extend the rebound from the start of the month should the central bank warn of a protracted recovery.

With that said, the BoC rate decision is likely to influence the near-term outlook for USD/CAD as Governor Macklem and Co. start to scale back the emergency measures, and the Canadian Dollar may continue to outperform its US counterpart if the central bank unveils a less dovish forward guidance for monetary policy.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong