Forex Trading Library

The Loonie Could Bring More Surprises

0 1,083

Earlier this week, the Canadian dollar hit a 9-month high, as the USDCAD continued to drift lower. This is remarkable additionally because in the same period, the greenback has also been getting stronger. The Loonie has had its own special performance, but is getting extra attention for what it implies for other currencies.

One of the big factors is oil, since that’s Canada’s largest export. Crude prices have been fluctuating lately from downward pressure due to worries about a global recession being counteracted by OPEC+ cutting production in a bid to keep prices higher. In all, however, over the last 9 months crude price have generally trended lower. Meaning that the latest strength in the CAD has more to do with other factors.

Take note of the leader

In the current rate hike cycle, the BOC has sort of “led” the Fed higher in tightening. Typically, the BOC meets before the Fed, so just on a chronological basis, if both central banks are hiking, then the BOC’s move will come first. This is notable because the Fed was on the most aggressive rate hike path since the 80s, and so was the BOC. For a period of time, it was hiking even faster.

Then, early this year, the BOC decided to pause rate hikes, with inflation coming down and the economy seen as a little more shaky than in the US. But, just recently, inflation started drifting higher and forced the BOC to surprise markets by hiking. This was seen as a potential warning for other central banks that might be looking to pause, and that if the central bank eases up tightening pressure, inflation could turn around.

What the data says

The move by the BOC seems to have made an impact, at least as far as analysts are concerned. They are forecasting May inflation to come down to 4.2% from 4.4% reported in April. That still doubles the BOC’s target, but an improvement nonetheless. The core rate, however, is expected to remain problematic, coming down just one decimal to 4.0% from 4.1% prior.

Canada is facing a similar “problem” as the US and the UK, and as forerunner on policy, could foreshadow what those countries might face. The labor market has remained very strong during the recovery from the pandemic, with businesses facing difficulties hiring. Wages have not kept up with inflation as of yet, but are growing at a pace much faster than the inflation target. Implying that getting cost-of-living increases down to target would take some interruption in the labor market.

A chance for a rebound?

The jobs market is seen as still tight, and monthly GDP expected to show a pick up in the pace to 0.2% from 0.0% prior. Those factors combine to make the case for more rate hikes. The BOC acknowledged in the minutes that hiking or pausing was a fine balance, and would be data-dependent for the next meeting.

Any outperformance of the data over the next week could give more reason to be bullish for the Loonie. Particularly if there is renewed optimism about the economy that could lift crude prices. On the other hand, the balance is still delicate, and it might not take much of an underperformance to push the Canadian dollar down compared to its trading peers.

Test your strategy on how the USDCAD will fare with Orbex

Leave A Reply

Your email address will not be published.