In mid-April, Wells Fargo analysts have published a forecast that the USD/CAD will reach the level of 0.99 in six months (by mid-October). I remembered this forecast because my forecast for the Canadian dollar dynamics in 2013 was exactly the same.
My expectations were based on strong data on the U.S. economy released in 2013. The Canadian dollar is well known for its positive reaction to strong data from the U.S. Sometimes the Canadian currency rises even higher than the greenback. I believed that sustainable growth of the U.S. economy will support risk acceptance, while a low-yielding dollar won’t be able to satisfy this need.In this situation, the Loonie will gain profit, which will benefit from the economies ties of the New World and the Bank of Canada’s plan to tighten monetary policy. So the USD/CAD is expected to fall.
Despite this logic, the forecast was never confirmed yet. The growth of the Canadian economy and the labor market was much weaker than expected this year. On the other hand, the Fed’s sudden announcement to reduce the bond buying program resulted in strengthening of the U.S. dollar. As a result, the USD/CAD chart has formed a bullish trend, which lasts for about a year.
However, the Canadian dollar still has about two months to fulfill the Wells Fargo forecast or at least reach the parity level against the American dollar. Theoretically, the pair may return 300 points separating the pair from the level of 1.0. Will these expectations confirm?
In the recent past weeks, the Loonie was slowly pushing the U.S. dollar. This rise is supported by several factors, like positive oil dynamics. However, it’s too early to discuss a trend change: technically, this is a correction within the uptrend. The pair needs stronger data for crossing this support level.
In my opinion, only one news item can result in breaking this level: if the Fed doesn’t hurry with QE3 tightening. Before the FOMC meeting in September, the USD/CAD dynamics will mostly depend on investors’ sentiment (who still have doubts about trimming quantitative easing in the U.S.), so there will be no clear dynamics. If the Fed doesn’t make the fateful decision in September, the pair will be expected to move south. However, this movement will not last for long. This can be a short-term momentum, as investors will soon realize that delaying QE3 reduction does not mean that this event is no longer inevitable. Investors will start buying the dollar.
I suppose that even if the USD/CAD reaches parity in the second half of the year, this will be only a touch with upcoming bounce up.