The Canadian Dollar had a great start to the New Year 2018. USD/CAD tumbled at one point on Friday to 1.2372; the lowest since September 27th. On Monday it mostly consolidated these gains in a range 1.2385-1.2435 but on Tuesday in the face of a generally stronger US Dollar, investors were beginning to have second thoughts about pushing the Canadian Dollar much higher. USD/CAD touched 1.2475 and has held around that level for much of the overnight session in Asia.
After Friday’s Canadian employment report, the market-derived probability of a rate hike at the Bank of Canada’s next meeting on January 17th surged to 70%, from 40% earlier in the week. On Monday, those rate hike odds hit 86% after the Bank of Canada published its Q4 Business Outlook Survey; the last real chance for the Central Bank to communicate something dovish ahead of next Wednesday’s monetary policy meeting. Indeed, five of the six major Canadian banks are forecasting a 25bp hike.
The first point to make, therefore, is that a rate move is almost fully discounted. We then need to look at risks. There’s realistically a zero probability of a 50bp hike, so the risk is BoC does nothing. A risk, of course, is not the same as a prediction though BoC Governor Poloz has previously spoken about the benefits of surprising financial markets rather than flagging its plans well in advance.
We’ll get to see data on Canadian building permits and new house prices later this week. Ahead of that, the Canadian Dollar opens in Europe this morning at USD1.2475, GBP/CAD1.6860 and AUD/CAD0.9750.