Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

BoC Preview: CAD Could Fall, Even If Poloz Hikes

Published 07/10/2018, 01:34 PM
Updated 05/14/2017, 06:45 AM

While the Federal Reserve has grabbed all the headlines for raising interest rates lately, its neighbor to the north has actually been just as aggressive in tightening policy over the last year. The Bank of Canada has raised its benchmark interest rate three times since the start of last July and if economists are correct, another hike is likely at Wednesday’s meeting.

The Canadian economy continues to show steady improvement, with recent data confirming the underlying strength. While the latest GDP print showed just 0.3% growth quarter-over-quarter (1.3% year-over-year), the country’s inflation rate has held above the central bank’s 2% objective for the last four months. After a disappointing 7.5k decline in employment in Canada’s May jobs report, the June release showed a stellar 31.8k rise in total jobs, well above the 22.3k increase expected.

CAD, Oil And Housing

Recent market movements are perhaps the most important factor auguring for a hike. Since the BoC’s last hike in January, the Canadian dollar has fallen by more than 700 pips against the US dollar, which is its most important trading partner. Meanwhile, the price of oil, Canada’s most important export, has surged nearly 17% in the last three weeks to tag a nearly 4-year high. Fears of frothy housing prices in major metropolitan areas like Toronto and Vancouver provide another reason for Stephen Poloz and company to raise rates yet again.

Market watchers have taken note of the recent bullish news: the market-implied odds of a rate hike have risen to above 80% as of writing, and a recent survey by Bloomberg showed that 14 of the 18 economists queried expected a rate hike. At this point, it may be more destabilizing for the BoC not to raise rates!

Assuming the central bank raises interest rates as anticipated, the focus may quickly turn to the future, namely the probability of another interest rate increase this year. Markets are currently pricing 50/50 odds of another hike this year, but that probability will almost certainly shift based on the tone of Poloz’s press conference.

If the BoC Governor downplays the risks of trade tensions with the US (including the potential for a collapse of NAFTA) and focuses on the strong domestic economy, USD/CAD could break its bullish trend line to test the key psychological barrier at 1.30. On the other hand, a more tepid economic assessment could lead to loonie weakness (even if the central bank raises rates), with USD/CAD bulls turning their eyes back toward the late June highs above 1.33.

Daily USD/CAD

Source: TradingView, FOREX.com

Cheers,

Latest comments

The speculators have become overly bearish on CAD recently and thus I think USDCAD is about to collapse.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.