BoC looks poised to raise interest rates by 50bps this week
USD/CAD ended the week around 1.2570, which is disappointing from a CAD-bullish standpoint after reaching levels near 1.24 in the middle of the week, and plainly leaves the CAD exposed to more weakening. Given what looks to be a good backdrop for the CAD, this seems a little unusual. After a 336k increase in February, the March jobs statistics showed a gain of 72.5k, which was close to the 80k consensus. Full-time jobs increased by 93k. The unemployment rate in Canada fell to 5.4 percent, a new low (since 1976). Wages increased (3.7 percent Y/Y) and hours worked increased 1.3 percent in the month, indicating that the economy is still moving upward. As policymakers respond to tight labour markets, increasing wages, and above-target inflation, the statistics support the idea of the Bank of Canada hiking the Overnight Target Rate by 50 basis points this week and opening the door to future 50 basis point raises in the months ahead.
What’s wrong with loonie?
So, what's wrong with the CAD, and why is it losing ground against the US dollar? Broader market volatility has increased slightly, but the CAD's performance in March was still hampered by it. Oil prices have fallen slightly but remain high, and while Canada's terms of trade have weakened slightly since the peak in March when crude oil prices soared, they remain quite favorable (multi-year highs). The fundamental problem appears to be the dollar's broader gain in the face of rising US yields. We note that Fair Value models imply an equilibrium near 1.2650, which suggests that underlying risks for the CAD against the USD are marginal to the downside in the short term. Observe the foreign exchange rates.
The week ahead
The main focus for the CAD this week is the Bank of Canada's policy announcement, with all major Canadian bank analysts expecting a 50 basis point hike. Expect a hawkish undertone in the policy statement, MPR, and Governor Macklem's news conference, which will boost the CAD widely. However, there's a chance that policymakers will either a) fail to deliver what's already priced in or b) provide insufficiently aggressive guidance. Furthermore, high-profile US data measures such as the CPI, PPI, and Retail Sales are likely to show significant growth in March. Inflation is predicted to hit a new cycle high this year, with the CPI rising to 8.4 percent and the PPI rising to 10.6 percent. The dollar will be supported by strong US statistics.
This week’s currency range is quite wide given the significant risk factors – USD/CAD trading range (1.2350 – 1.2650).
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