Bank of Canada expected to slow their tightening pace as inflation rolls over

[MongiIG]

The Bank of Canada looks set to slow their tightening pace, with USDCAD looking primed for another push higher

Source: Bloomberg

 

 

 Joshua Mahony | Senior Market Analyst, London | Publication date: Monday 05 December 2022 

When is the Bank of Canada meeting?

The Bank of Canada (BoC) will provide their latest monetary policy announcement at 3pm, on Wednesday 7 December 2022.

Inflation rolling over, allowing the BoC to slow the pace of tightening

Inflation in Canada has largely mimicked the US of late, with the June peak occurring simultaneously between both countries. This recent decline does provide some hope that the central bank will ease its pace of tightening, with markets now predicting the BoC will soon see rates grind top out at 4.25%. That correlation between US and Canadian inflation can be seen below, with the forecasts for interest rates also highlighting how we are expecting to see Canadian rates flatline lower and earlier.

This month sees expectations of a 25-basis point hike from the BoC, with markets attributing a 69% chance that we will see the bank break from the 50-100bp hike range seen over the past five-meetings. The remaining 31% accounts for the chance of another 50-bp hike.

Source: Eikon

Energy remains a key concern for USDCAD?

Crude oil has been on the back foot over much of this year, easing inflation concerns to a degree. The Canadian reliance on energy as a source of revenues has typically helped drive a strong inverse correlation between USDCAD and crude. We can see this relationship below, with WTI flipped to show one significant reason behind the USDCAD rally. With Chinese demand coming back online, there is a chance we could see a strengthening of crude in time. Such a rise in energy costs could subsequently help drive USD/CAD lower. It is certainly notable that the close relationship between the two has wavered somewhat of late, with the late-October pop in USDCAD occurring in the face of rising energy prices. Nonetheless, that correlation appears to have kicked in once again over recent weeks.

Source: TradingView

Where now for USDCAD?

USDCAD has been on the back foot over the course of the past two-months, with price dropping into a confluence of the 100-day SMA and 61.8% Fibonacci support level. The uptrend dominant over the course of this year does bring expectations of another move higher before long. With that in mind, another rise looks likely before long. A swift end to the monetary tightening phase from the Bank of Canada could bring greater upside as the Fed continue to raise rates.

Source: ProRealTime