Canadian Dollar: October hike bets fuel gains against US Dollar - MUFG

MUFG's Lee Hardman notes that the Canadian Dollar (CAD) is rebounding against the US Dollar, with USD/CAD falling to 1.4071 as markets increasingly price in a BoC rate hike. Rising longer-term inflation expectations and revised forecasts from major Canadian banks support the hawkish outlook, although weak employment data pose risks. A potential second hike in December could provide further support for CAD.

Hawkish BoC repricing boosts CAD

"The Canadian dollar has continued to rebound against the US dollar resulting in USD/CAD hitting a low yesterday at 1.4071 as it moves further below the high from 14th October at 1.4300."

"The Canadian dollar has been boosted by the hawkish repricing of BoC rate hike expectations. The Canadian rate market has moved to more fully price in a 25bps hike as soon as next week. There are currently around 21bps of hikes priced in compared to only 9bps at the end of last week."

"Those expectations have been encouraged by three major Canadian banks all changing their rate calls to a hike at next week’s policy meeting."

"The BoC also released its latest business and consumer outlook surveys which found that households’ longer-term inflation expectations are rising."

"However, it is not a done deal given the recent softer economic data flow from Canada including the second consecutive month of heavy job losses in September."

"The BoC has recently signalled that they are moving closer to hiking rates. If they place more weight on forward looking measures of inflation risks, and the Canadian rate market continues to price in a high probability of a hike heading into next week’s meeting, we expect the BoC to pull the trigger and tighten policy."

"A decision to raise rates this month would then encourage speculation that they could follow that up quickly with a second hike before the end of this year in December providing more support for the Canadian dollar."

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