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Canadian Dollar Forecast: Bank of Canada Heading Towards a Final Rate Hike

By Justin Mcqueen

15:49, 24 January 2023

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Bank of Canada outlook
Bank of Canada outlook - Photo: Capital.com. Source: Getty Images

Bank of Canada Preview 

Overview: The Bank of Canada is scheduled to announce its latest monetary policy decision on January 25th and quite possibly the final rate hike in this current cycle. As it stands, money markets are pricing in a 70% probability of a 25bps rate hike, to take the overnight target to 4.5%.   A reminder at the last meeting, the BoC added flexibility to its forward guidance, stating that the governing council will consider whether the interest rate needs to rise further, which in turn has raised expectations that the bank will hit the pause button after this month. 

Data: Economic data has been somewhat mixed, while inflation has been heading in the right direction with the headline rate at 6.3% from 6.8% and the average of core inflation down to 5.63% from 5.76%, the figures remain uncomfortably high. What’s more, as shown in the most recent employment report, the labour market remains tight with the economy adding 104k jobs in December, significantly above the estimate for 8k jobs created. However, a key input into the BoC’s decision-making is the business outlook survey, which showed that in Q4, rising interest rates have been dampening the outlook regarding firms’ sales expectations and investment plans, which provides the strongest case for the Bank of Canada to look at hitting the pause button.

Canadian Inflation  

Canadian InflationCanadian Inflation - Photo: Capital.com. Source: Refinitiv Datastream

CAD: According to the options market, the implied move for USD/CAD is 58pips (higher or lower from the spot price). As mentioned above the expectation is for the central bank to deliver a 25bps hike, however, the major focus is whether the central bank confirms that they have hit the peak interest rate. IF the BoC signals further hikes are needed, the Canadian Dollar would likely have a knee-jerk move higher (lower USD/CAD), although, as we have seen in recent months, rate hikes have not been the key driving force behind the Loonie’s performance and in fact, more rate rises may well be a detriment to the currency in the long run given the economy’s heightened sensitively to rising rates with regard to the housing market. On the flip side, a decision confirming that the BoC has indeed paused rate rises could see a somewhat muted reaction given that markets are priced for a pause going forward. The main takeaway is that the BoC’s rate decisions have not been the key driver for the currency (chart below) and thus outside of a knee-jerk reaction, this is likely to remain the case. 

Natural Gas

2.78 Price
+2.900% 1D Chg, %
Long position overnight fee -0.0735%
Short position overnight fee 0.0483%
Overnight fee time 22:00 (UTC)
Spread 0.005

BTC/USD

23,106.95 Price
+1.540% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 22:00 (UTC)
Spread 60.00

XRP/USD

0.40 Price
+2.360% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 22:00 (UTC)
Spread 0.00315

Oil - Crude

79.28 Price
+1.730% 1D Chg, %
Long position overnight fee -0.0196%
Short position overnight fee 0.0049%
Overnight fee time 22:00 (UTC)
Spread 0.03

USD/CAD Reaction to Shock 100bps Hike

Canadian Dollar ChartCanadian Dollar Chart - Photo: Capital.com. Source: Tradingview

On the technical front, USD/CAD continues to trade in narrow ranges as the Loonie lags the rest of the G10 during this softer USD environment. As long as equities and oil prices remain stable, USD/CAD can continue to drift lower towards key support at 1.3200-1.3310 where a closing break below opens the door to sub 1.30 in the pair.

USD/CAD chart: daily time frame

USD/CAD Daily ChartUSD/CAD Daily Chart - Photo: Capital.com. Source: Tradingview

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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