The Canadian dollar will weaken to 1.35 to the US dollar should the Bank of Canada surprise investors on Wednesday by keeping interest rates on hold, says the latest research report from BNP Paribas.
Derivatives markets are pricing in a near-80 percent probability that Canadian rates are increased midweek by a quarter-point to 1.5 percent, hence BNP’s expectation that a hike will do little more than “reinforce the current USD/CAD range.”
A decision to hike will likely see USD/CAD at 1.30, says BNP, from Friday’s closing rate of 1.3088.
The Canadian dollar gained 0.3 percent on Friday relative to its US counterpart after data showed Canada adding more jobs than expected for the month of June (+31,800 versus a forecast of +22,300). Canada did, however, see an unexpected tick-up in its unemployment rate to 6.0 percent, from 5.8 percent.
The US employment report, also released on Friday, showed similar traits – more new jobs than expected coupled with an unexpected tick-up in unemployment – but some traders were unhappy with lower-than-expected earnings growth of 0.2 percent (0.3 percent expected).
Scotiabank, like most others, foresees the Bank of Canada raising interest rates next week but also offers their technical perspective on USD/CAD.
“Downside risks are building,” one of Scotia’s FX strategists said on Friday, indicated by “net losses last week…against the long-term retracement resistance at 1.3385.”
Scotiabank’s year-end forecast for USD/CAD stands at 1.28. The bank also sees the “loonie” strengthening against the Australian dollar, to 0.935 per AUD, and against the Japanese yen, to 86.0. EUR/CAD, however, will remain unchanged at levels close to 1.535.
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