While most of the world’s central banks are tightening monetary policy, rate hikes do not necessarily support the national currency. Let’s discuss the topic and make up a trading plan for USDCAD.
Weekly Canadian dollar fundamental analysis
The minutes of the ECB’s September meeting were full of phrases about the forced rate hike, but this did not help the euro. The head of the Bank of Canada, Tiff Macklem, copied Jerome Powell’s speech, saying that it is unclear when the overnight rate hike would end, but USDCAD continues to trade near its 2.5-year high. Buying a pair in the first half of September yielded great profits. What are the prospects for October?
Recently, consumer prices in Canada have slowed to 7%, while core inflation is around 5%. However, BoC sees no signs of a further decline in its growth rate. The central bank needs proof that this is happening. This factor, together with heightened inflationary expectations, means that the monetary tightening cycle needs to continue.
In 2022, the overnight rate increased by 300 bps up to 3.25%. After the hawkish statements by Tiff Macklem, relying on a strong labor market, domestic demand and the fact that the work of the central bank has not yet been completed, the futures market expects borrowing costs to rise by 50 bps at the October 26 meeting.
Dynamics of Canadian inflation and overnight rates
Source: Trading Economics.
Thus, unlike the Reserve Bank of Australia, the BoC is not going to slow down monetary restriction and is ready to raise rates even higher. According to the Canadian regulator, only this approach will help avoid recession. Stopping now would require a monetary tightening in the worst of conditions, which will hit the Canadian economy more.
At first glance, the central bank’s hawkish stance, coupled with rising oil prices, creates favorable conditions for the loonie. Indeed, as the currency of an oil-exporting country, it should have been optimistic about OPEC+ plans to cut production by 2 million bpd, the ceiling on Russian oil prices, and Goldman Sachs and Morgan Stanley forecasts of Brent prices rising above $100 per barrel by the end of the year.
Alas, this is not enough for a serious USDCAD correction. The US dollar is stronger than ever. The 20-year high zone and the oversold USD don’t matter. When the energy crisis in Europe imposes a taboo on the purchase of European currencies, and the Fed is not going to suspend the increase in the federal funds rate, it is too early to expect the greenback to lose its high status. The continued rally in Treasury yields and the fall in US stock indices will push the USD even higher.
USDCAD trading plan for a week
In the short term, the September US and Canadian jobs reports will affect the dynamics of USDCAD. Bloomberg experts expect an increase in employment by 250 thousand and 20 thousand, as well as maintaining unemployment at 3.7% and 5.4%, respectively. It is unlikely that one report will force the Fed to change its outlook so that weak data will allow to add up to the USDCAD longs entered on the decline to 1.295 with targets at 1.38 and 1.395.
Price chart of USDCAD in real time mode
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