FX Daily: BOC might push back against aggressive rate hike bets

USD/CAD is low vs the DXY Index
Philip Wee27 Oct 2021
    Photo credit: Unsplash Photo

    Heading into the Bank of Canada meeting today, CAD has depreciated over the past week to 1.2390 per USD from 1.23, its strongest level in four months. The central bank is widely expected to reduce weekly government bond purchases a fourth time to CAD1bn. Since 21 April, the BOC has reduced purchases thrice from CAD5bn to CAD2bn. USD/CAD continued to fluctuate with the DXY index until the past month when it fell from 1.29 to 1.23. Why? First, the Canada stock market was ahead of the US in posting record highs this month. The recent global risk rally and high oil prices also fueled the appetite for commodity currencies. Second, the market expects the BOC to lift its inflation forecast today and has priced in four rate hikes next year starting April 2022. BOC Governor Tiff Macklem might push back against these aggressively hawkish expectations by insisting that the high inflation in Canada is transitory. This morning, Australia’s CPI inflation slowed to 3.0% YoY in 3Q21 from 3.8% in 2Q21. As things stand, the BOC plans to raise rates only after the economic slack has been absorbed in 2H22. If so, USD/CAD could push above 1.24 ahead of next week’s FOMC meeting. 

    DXY Is holding firm around 94 ahead of its FOMC meeting on 3 November. Although the US 10-year treasury yield eased to 1.608% from 1.631%, it held above 1.60% for a seventh session in anticipation of the Fed’s decision to start tapering asset purchases through mid-2022. Meanwhile, strong US corporate earnings lifted Dow and S&P 500 to new record highs again but only after a choppy session. Profit-taking emerged after the first two hours of trading and during the final half -hour of the session. US consumer confidence index started 4Q21 on a positive note, increasing to 113.8 in October from an 8-month low of 109.8 in September; October was also the first improvement in four months. Similarly, the Richmond manufacturing survey rebounded to 12 in October after falling three months to -3 in September. Yesterday, we noted that DXY was also supported by EUR whose outlook has weakened with Germany.

    Philip Wee

    FX Strategist - G3 & Asia
    [email protected]

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