USD/CAD, BOC Price Analysis & News
OVERVIEW: The Bank of Canada are expected to deliver its first rate hike of 25bps, which had been made clear at the prior monetary policy meeting. In light of the current geopolitical backdrop, money markets have pared back its aggressive outlook on policy tightening across the G10 space. However, there has only been a modest repricing in Canadian rates, given that soaring oil prices underpin the energy exposed Canadian economy.
WHAT IS PRICED IN?: As it stands, OIS markets are pricing in 20bps worth of tightening and thus a move to raise rates can be expected to provide support to the Canadian Dollar. That said, focus will be on the accompanying statement, which is likely to remain hawkish as the BoC guides on a series of rate rises. Therefore, a firmer CAD vs Euro and GBP is likely to persist.
Bank of Canada Rate Expectations
Source: Refinitiv
ECONOMIC DATA: After initial softness in Canadian data to begin the year, the economy has rebounded from the Omicron hit, meanwhile, inflation remains firmly above the BoC’s target. What’s more, the positive momentum in US data also bodes well for the Canadian economy. Elsewhere, while the current geopolitical backdrop surrounding Russia-Ukraine conflict has increased market angst, the Canadian economy should be somewhat shielded from the fact that oil prices are at 7-8yr highs and thus benefitting the country’s terms of trade.
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Taking a look at the BoC’s MPR assumptions, the central bank based its assumptions on Brent and WTI at $80/bbl and $75/bbl respectively. As such, given the current geopolitical risk premium reflect in the oil market with Brent and WTI soaring past $100/bbl, the BoC will maintain a hawkish stance.
MPR JANUARY ASSUMPTIONS VS CURRENT PRICE
Brent close to $80 (Currently $111)
WTI close to $75 (Currently $109)
WCS close to $65 (Currently $89)
| Change in | Longs | Shorts | OI |
| Daily | 5% | -8% | -5% |
| Weekly | -5% | 1% | -1% |
MARKET REACTION: According to the option markets, the implied move for USD/CAD is 70pips, while in terms of positioning, traders are modestly net long CAD. Although, fast money traders (leveraged funds) are slightly net short. A hike would be supportive for the Canadian Dollar, although, the main focus will be on the accompanying statement, which is likely to emphasise that this is the beginning of a series of hikes and thus prompt an extension of CAD gains. While macro has largely played second fiddle to the current geopolitical tensions, the Loonie remains shielded from risk aversion amid soaring oil prices and thus CAD upside is likely to persist.
