The USD/CAD surge towards 1.318-1.323 can be used for selling

The Bank of Canada is willing to raise a key interest rate for the third time this year and drive it to the highest level for the last decade; however the loonie is not performing so well. It seems strange for the currency of the country, whose assets are growing more appealing as the BoC goes on normalizing its monetary policy. Anyway, when the derivative market is 84% confident in the rate hike in October, weak growth of inflation rate and retail sales index leave the overnight rate unclear.

The week, ending October 26, is interesting with the meetings of two central banks, controlling G10 currencies. Investors don’t expect anything unusual from the ECB meeting; but the future decisions, taken by the Bank of Canada, make the loonie to be one of the most intriguing currencies this week. At first, it seems strange that the USDCAD is 2.5% up, ahead the important event and stable oil prices, the most important element of Canadian exports. However, unlike WTI, the WCS, crude oil produced in Canada, is getting cheaper. In addition, its connection with the Canadian dollar is getting very weak. The reasons for the worse correlation include the reduction of foreigners’ share, owning local oil companies, to 15%, from 17%.

Dynamics of WCS price and its connection with the Canadian Dollar

Source: Bloomberg

The USD/CAD price surged after the publication of disappointing data on the inflation rate and retail sales. The consumer price index has shown the worst results for the past nine months, being down by 0.4% M-o-M. On annual basis, the indicator is 2.2% up and is far from the psychologically important level of 3%, reported in July. Obviously, the strongest drive for the inflation rate increase in summer was high energy prices, a seasonal factor; it is fading out, and so, the Bank of England doesn’t need to tighten the monetary policy so soon. In particular, those, who expected a hike not only in October, but also in December, have been discouraged. Especially since the Bloomberg experts’ expectations haven’t been met by not only Canada’s inflation rate, but the retail sales index as well (0.1% M-o-M).

Dynamics of Canada’s inflation rate and the overnight rate

Source: Trading Economics

The USDCAD rally results not only from the BoC policy or the economic statistics for Canada. The U.S. dollar is quite strong amid the U.S. strong economy and the Fed’s monetary restrictions. The Federal Reserve is not following Donald Trump and is willing to hike the rate above the neutral level in case of necessity. The Bank of Canada, even if it raises the interest rate in October, is likely to sound hawkish. Nevertheless, even if the Canadian dollar is likely to trade down in the short-term, it can well recover on the middle- and long-term scope. It is because the BoC is expected to hike the interest rate four times more during the next twelve month. Therefore, Bloomberg experts suggest the median forecast for USD/CAD to be at 1.25 in late 2019. In this context, it makes some sense to use the USDCAD rise towards 1,318-1,323 for selling


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Price chart of USDCAD in real time mode

Loonie Sets a Bearish Trap

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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