Canadian Dollar Outlook: Markets Think Next Week’s BoC Rate Hike Will be the Last

The Canadian Dollar ended flat against the US Dollar this past week. That said, the Loonie spent the last few days mounting a comeback against the Greenback. On Friday, layoffs at Google helped trigger a rally in the tech sector, generally improving risk appetite with it. That dented the demand for havens, such as the US Dollar, sending USD/CAD lower to where it started at the beginning of the week.

Canadian inflation data also crossed the wires last week. Headline CPI clocked in at 6.3% y/y in December versus the 6.4% estimate, dipping from 6.8% prior. This is as the trim and median core rates surprised slightly higher. The latter two are more closely watched by the Bank of Canada. Speaking of which, all eyes are on the BoC this coming week.

On Wednesday, the central bank is expected to raise rates to 4.5% from 4.25%. If we look at market pricing on the chart below, traders are not anticipating any further increases after January’s interest rate hike. In fact, since the beginning of this month, markets have been quickly pricing in rate cuts down the road. About 3 more cuts were added to the 2-year horizon.

This is not terribly surprising, Fed Funds Futures are pointing to an almost exact same story for the Federal Reserve. Will this be the end of the BoC’s tightening cycle? In December, Governor Tiff Macklem said that data will guide the central bank on whether to hike or pause. While the CPI report was softer, December’s Canadian jobs report was rosier. The nation added 104k jobs versus the 5k estimate.

With markets increasingly betting on a pivot from the BoC later this year, the risk for markets becomes that this does not happen. As such, if the central bank continues to leave the door open to further tightening depending on incoming newsflow, that may cool dovish policy bets. That may end up as an event that boosts the Canadian Dollar in the week ahead.

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