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USD/CAD: Target revised from 1.3450 to 1.3100

29 June 2023

The Canadian Dollar outperformed procyclical G10 FX peers in the second quarter, supported by exposure to strong US demand and a hawkish Bank of Canada. Economists at Credit Suisse have upgraded their CAD outlook. Firm prospects for US activity suggest the trend can extend at the current pace. We revise our USD/CAD target from 1.3450 to 1.3100 and lower the Q3 target range to 1.2950-1.3520.

USD/CAD sits near two-week high, around 1.3265-70 zone amid modest usd strength

The USD/CAD pair trades with a mild positive bias for the third successive day on Thursday and is currently placed around the 1.3265-1.3270 region, just below a two-week high touched the previous day. Federal Reserve Chair Jerome Powell's hawkish remarks on Wednesday assists the US Dollar (USD) to stand near its highest level since June 15, which, in turn, is seen as a key factor acting as a tailwind for the USD/CAD pair. Speaking at a European Central Bank (ECB) conference, Powell reiterated that two rate increases are likely this year and did not rule out the possibility of a rate hike at the next FOMC policy meeting on July 25-26. Powell also said that he does not see inflation coming down to the Fed's 2% target until 2025.

The Canadian Dollar (CAD), on the other hand, is undermined by the softer domestic data released on Tuesday, which showed that consumer inflation fell to its slowest pace in two years. The markets, however, are still pricing in a greater chance of another 25 bps rate hike by the Bank of Canada (BoC) in July. This, along with a modest uptick in Crude Oil prices, lends support to the commodity-linked Loonie and caps gains for the USD/CAD pair, warranting caution before positioning for any further recovery from the YTD low touched on Tuesday.

Hence, any subsequent move up is more likely to confront near the 1.3300-1.3310 strong horizontal support breakpoint, above which a bout of a short-covering move could lift spot prices to the 200-day Exponential Moving Average (EMA). Traders now look to the US economic docket, featuring the release of the final Q1 GDP print, the usual Weekly Initial Jobless Claims and Pending Home Sales data later during the early North American session. This, along with Oil price dynamics, could provide some impetus to the USD/CAD pair.

The focus, however, will remain glued to the US Core PCE Price Index - the Fed's preferred inflation gauge on Friday. This will play a key role in influencing market expectations about the US central bank's future rate-hike path, which, in turn, will drive the USD demand and determine the next leg of a directional move for the USD/CAD pair.


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