CAD expose downside risk against the USD to BOC policy statement and NAFTA uncertainty. We believe Bank of Canada to hike 25bp to 1.25% on Wednesday meeting. In 2018 we are expecting 3 hikes, this week’s hike likely to shape a dovish hike.
On a medium-term basis, NAFTA uncertainty is the headline risk to the CAD, capping further CAD gains. The next round of NAFTA negotiations, sets for Jan23-28th.
Bank of Canada to hike on a neural basis or on a hawkish tone. In case of a neutral hike, CAD gains against the USD will limit to 1.2350. A hawkish hike will drag the USDCAD further to 1.2300 or in an extreme case 1.2200 it’s 80.0% reaction (below chart).
We are a buyer into BoC and a dip buyer ( at 80.0% fib reaction) into next week’s next round of NAFTA negotiations.
A potential close above 1.2600 could open to 1.2660 and 1.2770 in the near term. The latest IMM data suggest that CAD positioning increased slightly ahead of BoC meeting.
In the medium term, 1.29 and 1.2970 are achievable in case of a higher low pattern on the weekly chart. If the pattern evolved as we expected 1.3200 is the final target.
The USDCAD remains flat in Asia trade (1.00 PM AEST) as investors brace for BoC rate hike. Intraday trading range remains between 1.2300 and 1.2600.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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