The loonie is well-positioned to revisit its strongest level of the year as traders boost wagers that the Bank of Canada will resume interest rate hikes.
(Bloomberg) — The loonie is well-positioned to revisit its strongest level of the year as traders boost wagers that the Bank of Canada will resume interest rate hikes.
Chances of a 25 basis point hike at the June meeting rose to one-in-three, the highest since early March, after Tuesday’s unexpected jump in the annual pace of Canadian consumer inflation, the first such increase since June 2022. Odds of a hike by October reflect a near certainty, reversing expectations of year-end cuts just two weeks ago.
The change in outlook follows a string of solid economic data including the April jobs report, housing data and consumer sentiment indicators. Renewed rate hikes from the central bank could finally push the currency above this year’s highs.
“The risk of a resumption to the Bank of Canada’s hiking cycle is, in our view, under-appreciated by markets,” said Jay Zhao-Murray, a currency analyst at Monex Canada in Toronto. “Should the market-implied odds of another hike continue to move higher, we would expect the loonie to rally in the coming weeks.”
Canada’s policy rate has been stuck at 4.5% since January after Governor Tiff Macklem and his officials left the policy rate unchanged for the second straight meeting last month. They next meet June 7.
“We still need to see more data to say that another hike by July is certain, but the risks have shifted,” said Bipan Rai, a currency strategist at Canadian Imperial Bank of Commerce. “The debt ceiling noise will maintain the floor on USD/CAD at around 1.33 for now.”
That floor may be reached sooner rather than later if loonie gains trigger a shift in futures positioning. Commodities Futures Trading Commission data show net shorts in the currency have recently dropped from a four-year high.
The Canadian currency could also get a boost from speculative buying as carry trades are unwound. A turn for the better on two other drags on the loonie — falling commodity prices and US debt ceiling angst — could also work in its favor. Commodity prices could reverse their descent if Chinese officials respond to calls for more stimulus.
There are already bullish signs: the currency’s 100-day moving average is on pace to close above its 200-day moving average in coming weeks for the first time since September 2020.
The Canadian dollar was the second-best performer among peers against the dollar and the yen on Wednesday. It rose as much as 1% against the yen, setting a fresh year-to-date record.
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