Forex trading - can a more hawkish BoC drive the loonie to new strength?

With the latest labour market figures showing Canada’s unemployment rate at its lowest in 40 years, the country’s central bank is expected to raise rates this week.

Hike Expected?

Jobless numbers reveal slack in the labour market has diminished even after the Bank of Canada started raising rates last summer. The jobless rate declined to 5.7% in December, the lowest level since figures began in 1976. The 193,400 jobs added since September was also the best quarterly performance since that year.

Meanwhile the BoC’s own quarterly business report paints a picture of increasingly tight conditions for businesses.  Indicators of capacity pressures and labour shortages picked up, the Winter 2017-18 Business Outlook Survey said, which reflected ‘strong demand and tightening labour markets’.

While the BoC has been worried about how changes to Nafta could dent business optimism and investment, it does not appear to be having an effect on confidence. Higher oil prices, which hit three-year highs this week, further support the bullish case for CAD.

All six of Canada’s big commercial banks calling for a rate hike when policymakers meet on January 17th. Following two increases last year, there is now a firm chance that it will raise rates to 1.25% from the current 1%. This would take it back a level last seen in 2009 and will be seen as part of a global shift out of ultra-loose monetary policy as growth picks up across the world.

Firmer oil prices and expectations of tighter monetary policy has sent USDCAD to best levels since last autumn when markets expected the central bank to follow through with more hikes. But the greenback is finding firm support at the 1.24 level and with a rate hike already priced in it may take further hawkishness to drive more gains for CAD.

And a hike is not a done deal. Governor Stephen Poloz is wary about raising interest rates given Canada’s ‘high levels of debt’. Moreover, although growth last year was the best in six years, inflation remains stubbornly low. Although the BoC report showed that firms expect growth of input prices to rise due to gains in commodity prices, there will only be a limited pass-through to output prices due to ‘competitive forces’. Moreover it said inflation expectations are ‘modest and unchanged from the third quarter’.

USDCAD levels to watch

A more hawkish BoC could drive further strength for CAD, particularly after the loonie gave up much of its post-employment report gains.


A break to the downside for USDCAD (ie, CAD strengthening) could take out near term support and the level to watch is 1.2060, the September 2017 low which forms the last line of support for USD, which is pretty much on the 50% retracement of the move from the Sep 2012 low of 0.96 to the Jan 2016 high at 1.46.

A less hawkish BoC could see USDCAD retreat to the safety of the 1.27 handle, which forms the 38.1% retracement of that move, and is also the 38.1% retracement of 2017’s high in May at 1.37 to the September low.

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