The Bank of Canada is widely expected to raise its overnight rate by 25 basis points to 2.50% on Wednesday. Traders now watch the bank's forecasts and guidance, which could decide whether USD/CAD slips below 1.4000 or rebounds.
The Bank of Canada is widely expected to raise its overnight rate by 25 basis points to 2.50% on Wednesday, October 28. It would be the bank's first increase in a year. Overnight index swaps imply roughly an 80% probability of a move.
Energy prices drive the case for a hike
The policy rate currently stands at 2.25% after a series of holds. Governor Tiff Macklem signalled that forecasts for inflation are likely to be revised higher in the upcoming Monetary Policy Report.
Oil is a central concern. Brent crude briefly climbed above $117 per barrel this month amid Middle East tensions. September inflation accelerated to 3.1%, above the upper end of the bank's 1%-3% target range, though much of the increase reflects higher energy prices.
Growth holds up, but the labour market softens
The economy has proved more resilient than many expected. Second-quarter GDP growth surprised on the upside at 3.3%, and exports have recovered despite trade tensions with the US.
However, signs of moderation are emerging. Employment fell by 68,300 in September, a second consecutive monthly decline, and unemployment has edged higher.
USD/CAD outlook hinges on guidance
The Canadian dollar has been supported by higher oil prices and rising expectations for a rate increase. Recent repricing has also narrowed the US-Canada two-year yield spread, reducing part of the US dollar's rate advantage.
A 25bp hike with higher inflation forecasts and openness to another increase by March could push USD/CAD below 1.4000 towards the 200-day SMA near 1.3880.
A cautious message, by contrast, could see markets refocus on tighter US policy, allowing USD/CAD to rebound towards 1.4100 and potentially the eighteen-month high near 1.4230.
Source: ActionForex
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