Canadian Dollar strengthens against US Dollar on October rate hike bets - MUFG

With USD/CAD down to 1.4071, MUFG's Lee Hardman highlights a recovery in the Canadian Dollar (CAD) against the US Dollar as markets price in a greater likelihood of a BoC rate rise. Higher longer-term inflation expectations and changes to major Canadian banks' forecasts underpin the hawkish outlook, though weak employment figures present a risk. CAD could receive additional support from a possible second rate rise in December.

CAD gains as markets price in a more hawkish BoC outlook

"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.)