Talking Points:
- Overnight index swaps point to north of an 85% chance of a rate move today by the Bank of Canada, a near guarantee for a hike.
- Accordingly, the BOC will need to offer hawkish forward guidance - implying that at least two more rate hikes this year are possible - in order to keep the Canadian Dollar on its hot streak to start 2018.
- Retail trader sentiment points to a bearish trading environment for most USD-pairs.
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The US Dollar (via DXY Index) has seen its losses stabilize over the past 24-hours, thanks in part to disappointing December CPI readings out of the UK and the Euro-Zone. While these inflation data won't necessarily be the catalyst for calling the top in EUR/USD or GBP/USD, they are offering traders enough of a reason to momentarily reconsider their positioning; any losses henceforth would be profit taking.
Whereas the impact of the inflation data on BOE or ECB policy is minimal at this point in time - and to be clear, none of the data revealed over the past 24-hours will move the needle for the BOE or the ECB - we will get to see the realization of other speculative trends in the market with the Bank of Canada rate decision today.
The Canadian Dollar has had a strong start versus the US Dollar in 2018, mainly due to rapidly escalating BOC rate hike expectations. After the December 6 policy meeting, overnight index swaps were pricing in a 35% chance of a January rate hike. Entering today, the January rate hike odds have climbed above 85%. The reasons are two-fold: the last two inflation reports and the last two employment reports have been much better than anticipated.
As such, the rate hike odds for the BOC meeting still needing to converge at 100% when the rate hike is actualized. While this means a retest of the yearly lows for USD/CAD near 1.2350 could be on the horizon, it also means that the BOC will have to offer additional hawkish forward guidance on rates (i.e. suggesting that another rate hike could happen by June to keep the BOC on track for a minimum of three this year) to provoke a move down to fresh yearly lows. In fact, without explicity suggesting that three hikes are coming in 2018, the Canadian Dollar may unwind its early year gains versus the US Dollar.
Read more: USD Sell Off Hits Pause as Government Shutdown Looms
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
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