USD/CAD: recent rebound likely to prove short-lived - Rabobank

Analysts from Rabobank, forecast USD/CAD to be at 1.23 in 1M and at 1.25 in 3M. They see that the relationship between USD/CAD and interest rate differentials has broken down, but they warn that rate differentials are likely to become a major driver of USD/CAD again as we head into March.

Key Quotes: 

“The correlation between daily percentage changes in USD/CAD and the US-Canada interest rate differential on a 10 day time frame peaked at 88% back in December but now stands at a statistically insignificant 12% at the time of writing (...)  looking to the weeks ahead we see little reason for the correlation between USD/CAD and rates to resurface in earnest and unless we see a sharp move in oil prices that relationship is likely to fade as well essentially leaving USD/CAD at the mercy of USD price action and any NAFTA headlines that may emerge. As we head into March, however, rate differentials will likely prove key for USD/CAD once more.”

“USD/CAD rebounded off the lows and has broken the 23.6% Fibonacci retracement of the December to February sell-off and the pair is now sitting around the 38.2% retracement just a few pips above the 1.25 handle. Above here, the 1.2600/66 region should offer a lot of resistance as the confluence of the 50% retracement, the 50 and 100 day moving averages, and support turning to resistance from the Q4 trading period. In short, USD/CAD might struggle to make a sustained move north of the 1.26 handle. Momentum indicators are largely in neutral territory and our Rabo Momentum Model is also providing a ‘neutral’ signal leaving us with little guidance from a trend perspective.”

“We expect the Fed to raise rates 25bp at the March meeting (94% priced in) and although we expect the BoC to disappoint the minority calling for a hike in March (27% priced in), we do expect another 25bp hike at the April meeting.”

“We have revised down our one month USD/CAD forecast to 1.23 but have left our three month unchanged at 1.25. We see the recent rebound in USD as likely to prove short lived and don’t expect to see a sustained move north of 1.26 in USD/CAD over the coming weeks. The main caveat here is that NAFTA headlines have the potential to push the pair meaningfully higher but are of course very difficult to predict.”

“In terms of the main risks in the week ahead, data out of the US is mainly second and third tier although there are no fewer than seven Fed speakers set to talk before the weekend and many are specifically going to talk about the economy and monetary policy. Some also have Q&As. In terms of data, all eyes are on Friday’s Canadian labor data which we expect to remain upbeat in terms of both quantity (numbers) and quality (full-time>part-time).”