BOC Preview How the loonie could fall even if Poloz and company hike rates

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 most recent 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.

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, 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

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.

Source: TradingView, FOREX.com

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.