Canadian Dollar: Rate hikes in sight – Commerzbank

Commerzbank’s Norman Liebke notes that the Canadian Dollar has underperformed G10 peers but sees support from rising Bank of Canada rate expectations and high Oil prices. He argues that BoC communication has opened the door to rate hikes, while inflation expectations, fragile labour markets and US trade tensions will shape CAD performance and forecast paths for EUR/CAD and USD/CAD.

BoC tightening supports Canadian Dollar

"Nevertheless, Macklem’s latest comments have significantly increased the risk of an imminent rate hike, and we therefore expect an initial move before the end of this year. Although market participants assign an 85% probability to a rate hike this week, and we also expect a hike given the recent more hawkish comments, we nevertheless consider such a move due to the subdued core inflation premature. A total of four rate hikes are priced in by September 2027."

"While further moves next year are certainly possible, this expectation appears somewhat ambitious to us. The interest rate outlook nevertheless remains supportive for the CAD, particularly as our economists expect less tightening from the Fed and ECB by the end of 2027 than currently priced in. However, a substantial part of the expected BoC tightening is also likely already priced in, meaning that additional CAD strength will increasingly depend on the BoC adopting an even more restrictive stance than the market currently expects."

"This leaves the BoC facing an increasingly difficult balancing act. The signs of weakness seen so far are unlikely to be sufficient to rule out rate hikes, particularly because the Canadian real economy has been sending mixed signals for some time. But stronger labour market and economic data would reinforce the case for further rate increases."

"Conversely, a more pronounced deterioration in economic activity could limit the BoC’s scope for additional tightening. Moreover, changes in interest rates affect the real economy only with a lag, meaning the BoC would probably proceed more cautiously if the economy weakened further. The trade conflict therefore remains a key risk factor for the CAD: even if the effective tariff burden ultimately rises by less than feared, persistent uncertainty could weigh on Canada’s growth outlook and thereby limit the Canadian dollar’s appreciation potential."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)