USD/CAD Eyeing Upside Breakout Following Dovish BoC Rate Hike
Having spent the past few months in a narrow range between 1.3050 and 1.3850, the USD/CAD is starting to look at an upside breakout following a dovish BoC rate hike. The pair closed yesterday as a doji, but could easily see a pullback before it breaks above the key level. The upside breakout could take the pair up to 250 pips. If the BoC opts to raise interest rates by a full 50 bps, the move would put additional pressure on the US-Canada yield spread.
The recent decline in oil costs has been a major bullish catalyst for the Canadian dollar. However, despite strong oil prices, the Loonie has also been under pressure from recession fears. In September, the currency fell over 5% against the US dollar, the worst month for the currency since January 2015. The US Dollar is not alone in this weakness, as the Japanese yen has continued to fall sharply after G7 intervention.
The market has fully priced in a 50 bp increase to the BoC’s benchmark interest rate this month. The Bank of Canada has raised its policy rate seven times this year, the fastest pace since the 1990s. The BoC also lowered growth forecasts, which is one of the reasons for the weaker currency. The bank is also concerned about Europe’s potential double-dip. The upcoming inflation report will be a risk factor. If the inflation numbers are not too rosy, a BoC hike could be in the cards.
The Canadian dollar has lost 7% against the US dollar so far this year. This is a stark contrast to its strength against other G10 currencies. The strength of the Dollar is likely to remain for the foreseeable future, but the Fed may still be able to hike rates in small increments.
The Bank of Canada is also in a position to reprice the Canadian government’s 2-year government bond. If the BoC decides to increase interest rates by a full 50 bps, it could cause the bond yield to spike. In addition, the currency could experience inflation, which will put more pressure on imports and consumers.
The Fed’s announcement of Jerome Powell as its new chair has been a boon for the currency, but there’s still plenty of uncertainty in the Fed’s policy direction. Some members have suggested cutting short the $600 billion asset purchase plan, while others are dovish. The Fed is still expected to raise interest rates by 75 bps next week.
The Fed has a lot on its plate this week, including a Fed Beige Book and voting members. It’s possible that the Fed will vote to raise interest rates in the coming weeks, but there’s no real evidence to suggest that a hawkish stance is in the cards. It’s also possible that the Federal Reserve will raise rates in smaller increments than many are expecting.
With the Fed set to meet in less than two weeks, USD/CAD might see a retracement after the meeting. This could allow the US dollar to continue its assault against the Canadian dollar, but it’s still unclear whether a knee-jerk move is in store
