Why the Canadian Dollar is More Vulnerable to Bad News than Good
The latest communication from the BoC shows that the bank is clearly on an interest rate hiking path. Earlier in October governor Tiff Macklem said that he remains firmly on an interest-rate hiking path saying that price pressures are clearly elevated and risk becoming entrenched without further interest rate hikes. So, with that in mind here is a look at what to be mindful of when trading the CAD.
Despite the more hawkish comments from Governor Macklem there is a slowdown in the Canadian economy. House prices have been falling, jobs decreasing, and inflation has also been falling lower. The headline inflation figure has been dropping.
On top of this, the core inflation metric has been falling too.
So, Governor Macklem’s position would be vulnerable to changing if we saw more of a deceleration in the Canadian economy. Also, remember that the US is Canada’s biggest trading partner, so a slowdown in the US could also weigh on the CAD. The Bank of Canada’s current interest rate is 3.25%. Its terminal rate is priced in just under 4%, so the bank is seen as only 75bps away from that. The BoC is seen as hiking by 50bps at its next meeting on October 26. The meaning? The CAD is more sensitive to downward surprises than the upside ones.
The main takeaway
Any significant misses in incoming data could see the CAD rapidly re-price and sell-off. Traders should favour opportunities to sell CAD on bad data.
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