Key Reasons Why USD/CAD is Poised to Break Out to the Upside

Investors are looking at the future - what are the factors likely to affect the loonie?

This guest article was written by James Hyerczyk, financial analyst at FX Empire.

With all the focus this week on the monetary policy announcements by the Bank of Japan and the U.S. Federal Reserve, little has been said about the price action in the USD/CAD. This forex pair has reached a key point on the weekly chart that could trigger an acceleration to the upside.

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While the direction of U.S. rates and crude oil prices will have a strong influence on the USD/CAD, I think that traders should also throw into the mix the outlook for Canada’s inflation.

The Fed will make its interest rate decision on September 21. OPEC and non-OPEC countries will make a decision on oil production a week later. Sandwiched in between these two key events will be the release of Canada’s inflation data for August on September 23.

The U.S. Federal Reserve is very likely to pass on an interest rate hike at this meeting. However, it may issue a hawkish statement that signals a rate hike for December. Since passing on a September rate hike has already been priced into the market, the emphasis of this Fed policy decision will be on the wording of the Fed statement.

Investors are not looking at the present, they are looking at the future. So if the Fed is hawkish in its statement and the chances of a rate hike in December increase to above 50%, the U.S. dollar should rally, putting pressure on the Canadian dollar. In other words, a hawkish Fed statement will be bullish for the USD/CAD.

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OPEC and non-OPEC countries are set to have informal talks in Algeria next week. If they decide to freeze or cut production then crude oil may rally, but the move is not likely to turn the Canadian dollar bullish. This is because any agreement is not likely to last over the long-run. History has shown that these types of deals don’t work so I don’t believe it will have a lasting impact on the direction of the USD/CAD.

On September 23, Canada will release its latest inflation figures for August. Whether the USD/CAD continues its current bullish run could largely rest on the outcome of this report. The Bank of Canada has started to voice concerns about falling inflation so a weaker-than-expected inflation report could prompt the BOC to cut interest rates.

With the Fed possibly raising rates in December and the BOC entertaining the possibility of an interest rate cut, we could see tremendous pressure heaped on the Canadian dollar as lower interest rates tend to see a reduction of inbound investor flows which tend to keep currencies elevated.

Weekly USDCAD

The weekly USD/CAD chart indicates that the forex pair is poised to break out to the upside on a sustained move over 1.3252. This could create enough upside momentum to challenge 1.3582 over the near-term.

This week, traders should look for the USD/CAD to be firm if the Fed issues a hawkish monetary policy statement. The market should accelerate to the upside, however, on September 23 if Canada’s inflation number comes in lower than expected. The interest rate differential should widen at this time, making the U.S. dollar a more attractive investment than the Canadian dollar.

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