Fundamental Forecast for CAD: Neutral
- An interest rate increase by the Bank of Canada on Wednesday is now highly likely.
- However, after the Canadian Dollar’s surge Friday, that’s probably priced in already.
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There has been plenty of disagreement among analysts over whether the Bank of Canada will increase its overnight rate to 0.75% from 0.5% on July 12. As I reported here, a rate rise was once seen as almost certain after hawkish comments by BoC Governor Stephen Poloz but doubts then set in.
Those, though, were blown away Friday by a bumper labor-market report and now it would be quite a surprise if rates were left on hold. Friday’s data showed that the Canadian unemployment rate eased to 6.5% in June from the previous month’s 6.6% when an unchanged figure had been forecast.
Moreover, there was a rise of 45,300 in employment, well above the expected 10,000 though below the previous 54,500 increase. The reaction in the Canadian Dollar was a sharp rise against its US counterpart as traders argued that the economy – or at least the labor market – is clearly now strong enough to withstand a quarter-point rate hike.
Chart: USDCAD Five-Minute Timeframe (July 7, 2017)
That CAD surge took USDCAD down to its lowest level since September last year and one major Canadian bank was reported to have capitulated and changed its forecast for Wednesday to a rate hike. Note too that Canada’s Ivey purchasing managers’ index jumped to 61.6 seasonally-adjusted in June from 53.8 in May, well above the expected 57.8 and providing further justification for a rate rise if one were needed.
The clear implication, therefore, is that further USDCAD downside could be limited if monetary policy is tightened while the upside could be substantial if the BoC decides to leave it unchanged.
--- Written by Martin Essex, Analyst and Editor
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