BoC Heading for a 25bps Hike?
Next week the Bank of Canada meets and it will be an interesting meeting to see how confident the BoC is surrounding a potential slowdown coming for Canadian economic activity. Recalling October’s meeting, there was a 50/50 split over whether the BoC would hike by 50 or 75bps. In the end, the BoC opted for a more conservative 50 bps hike flagging rising concerns surrounding slowing growth for Canada. The BoC indicated that it is starting to consider slowing growth and some CAD downside was expected. These CAD falls were helped by oil market weakness over the Russian oil price cap which also weighed on CAD. You can see below the CAD falls which took place as anticipated at the time.
Further CAD falls to come?
In October after the rate statement, Governor Macklem highlighted that he expected a ‘significant slowing of the economy to occur’. So, for the meeting on Wednesday investors will want to know what Macklem’s view is now. Recent inflation data has been high, but markets did not see those prints as changing the BoC’s view. Short Term Interest Rate markets are pricing in around a 72% chance of a 25bps hike. See below for the Short Term Interest Markets probability from Financial Source.
The peak rate is expected to be at around 4.5% next June and the sharp sell-off we have seen recently in the CAD means that it may pay to be more cautious about the CAD for further selling. However, the next opportunity on Wednesday would come from a more hawkish response from Governor Macklem. If we could see the CAD retrace some of its recent falls, but the risk of a 1H 2023 recession remains, then fading CAD strength could make sense. However, finding the correct currency to pair CAD against will be key on the day and will be discussed in the weekly workshop that takes place on Wednesday.
About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation operating in Asia, Europe, and the Middle East.
High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.
*Any opinions made in this material are personal to the author and do not reflect the opinions of HYCM. This material is considered a marketing communication and should not be construed as containing investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. HYCM does not take into account your personal investment objectives or financial situation. HYCM makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast, or other information supplied by an employee of HYCM, a third party, or otherwise. Without the approval of HYCM, reproduction or redistribution of this information isn’t permitted.