Share:

Alvin T. Tan, Research Analyst at Societe Generale, explains the hawkish commentary from Bank of Canada officials this month has taken the FX market by storm and the implied probability of a 25bp BoC rate hike in its 12 July meeting has exploded from under 5% just three weeks ago to over 70% currently, and a full hike is priced in for 3Q17, according to Bloomberg.

Key Quotes

“BoC Governor Poloz's latest comments earlier this week were pointedly hawkish, stating that the 2015 rate cuts (of 50bp) “have done their job”, and that the BoC should be reconsidering the policy rate level, as “excess capacity is being used up steadily.” Deputy Governor Patterson also mentioned this week that “the economic drag from lower [oil] prices is largely behind us.”

“We previously mentioned the positive growth momentum in Canada this year, but noted that inflation remained the crucial missing piece. Wage growth has been unexpectedly weak despite the low unemployment rate, and core inflation readings have trended lower for several months. Nonetheless, the signal from the BoC is very clear, and a rate hike is imminent, if not in the July meeting, then in September. A full economic update will be released with the BoC’s monetary policy report after the 12 July meeting.”

“The BoC is gaining confidence in the growth and employment outlook, and is essentially betting on the Philips Curve reappearing soon. Another reason for the hawkish turn is the BoC giving greater prominence to its financial stability concerns stemming from high Canadian household indebtedness and regional housing booms centred in Toronto and Vancouver.”

“Canada's Parliamentary Budget Office (PBO) recently forecasted that debt servicing costs of Canadian households would rise to 16.3% of disposable income by 2021, which would be a record level. The pre-crisis 2007 record high was 14.9%. Household debt as a share of disposable income is over 173% currently and expected to climb to 180% by 2020. The PBO concluded that the financial vulnerability of Canadian households “would rise to levels beyond historical experience”, and the BoC raised similar concerns in its June Financial System Review.”

“We had maintained that the Canadian dollar is undervalued, and we had previously expected USD/CAD to trade to 1.30 by early 2018. That target level has now been reached, and the medium-term outlook for the CAD has turned more much bullish given the BoC's hawkish shift. The loonie’s undervaluation should support further appreciation. Our technical strategist has pointed to USD/CAD 1.25 as the target once support at 1.30 is broken, as is likely in coming weeks.”

“Perhaps more interesting from a relative viewpoint is to go short NZD/CAD following its failure to break through 0.98 earlier this month. A decline to NZD/CAD 0.92 by year-end seems to be in the cards now. A rally in crude oil prices towards year-end would be an added benefit to the loonie.”

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Follow us on Telegram

Stay updated of all the news

Join Telegram

Recommended content


Follow us on Telegram

Stay updated of all the news

Join Telegram

Recommended content

Editors’ Picks

EUR/USD holds above 1.0700, eyes on Powell

EUR/USD holds above 1.0700, eyes on Powell

EUR/USD edged lower toward 1.0700 in the early European session but managed to hold above that level. As investors await speeches from ECB officials and FOMC Chairman Jerome Powell, the pair struggles to make a decisive move in either direction.

EUR/USD News

GBP/USD falls to fresh monthly low below 1.2000

GBP/USD falls to fresh monthly low below 1.2000

GBP/USD came under renewed bearish pressure and touched its lowest level in a month below 1.2000 on Tuesday. Despite the modest improvement witnessed in risk mood, the US Dollar holds its ground and weighs on the pair as focus shifts to FOMC Chairman Powell's speech.

GBP/USD News

Gold retreats below $1,870 as US yields rebound

Gold retreats below $1,870 as US yields rebound

Gold price erased its daily recovery gains and turned flat slightly below $1,870 heading into the American session. Following a downward correction earlier in the day, the benchmark 10-year US Treasury bond yield staged a rebound and caused XAU/USD to turn south ahead of FOMC Chairman Powell's speech.

Gold News

Will Bitcoin price test $20,000 again?

Will Bitcoin price test $20,000 again?

Bitcoin price shows clear signs of distribution occurring on the four-hour chart, which indicates the possibility of a trend reversal. Moreover, BTC has been consolidating for more than two weeks with no direction in sight.

Read more

Central banks, markets and the economy: Three times wrongfooted

Central banks, markets and the economy: Three times wrongfooted

In the US, financial conditions have eased in recent months and weighed on the effectiveness of the Fed’s policy tightening. Jerome Powell recently gave the impression of not being too concerned, so markets rallied.

Read more

Forex MAJORS

Cryptocurrencies

Signatures