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  • 2022-12-03 02:20:54
  • by James Rauhm

Has CAD seen peak inflation: What next for loonie as BOC prepares to release the doves?

Did the geyser burst for CAD? Low economic growth – Canadian growth fell by half in the third quarter – plus weaker oil prices and a weaker USD have undermined the Canadian dollar. Add, too, a frail housing market hit by quick-fire Bank of Canada rate rises following an over-extended 25-year price appreciation bender. Down on the loonie? A touch. Even as the USD fell this week USD/CAD managed to find small gains, here and there. “CAD has been on a weakening trend of late with GBP/CAD now attempting to breach April's highs,” says Equals Money market strategist Thanim Islam. “Lower job numbers today and we could easily see further gains on this pair.” The Bank of Canada (BoC) ducked a meeting in November following October’s cautiously worded 50bp rate rise, resisting a 75bp move. The BoC meets on Wednesday to decide whether to hike rates to 4.25%, a 50bp rise, or dial it down to 25bp.

FX strategist and finance consultant at Keirstone, Francis Fabrizi

USD/CAD has continued its bearish trend on Wednesday after a pullback towards the 1.3650 resistance level says, Fabrizi “Price was unable to break above this level and retreated back down to the 1.3400 support level. Price is hesitant to commit to a direction this morning due to today’s NFP announcement scheduled this afternoon.” “I believe the price will attempt to break below the 1.3400 support level. If it is successful, 1.3250 will be the next target. If 1.3400 holds strong, the price will likely push higher towards 1.3600.” “Looking at the weekly timeframe, the price remains in a bullish trend however I anticipate a bearish move before buyers take control again.” The larger Canadian banks such as National Bank and Scotiabank are thought to be leaning toward 50bp but there is believed to be swelling concern about the risks of higher rates inside the BoC. Burning hot interest rates have soared from almost zero to 3.75% within eight months. However the Canadian jobs market is looking strong – even other-worldly. Canada’s economy saw a 108,000 jobs gain in October, some ten times the 10,000 estimates. Statistics Canada releases fresh insight today on the November stats; around 5,000 new roles are anticipated though this number could be rather less given the October performance. For now, MUFG Bank expects ongoing CAD underperformance against other G10 currencies “as the US dollar weakens later in 2023”. While the loonie was the best-performing G10 currency when the dollar heaved higher in September, CAD has been on a downward run since then, MUFG point out – the worst-performing G10 currency, in fact. MUFG’s Derek Halpenny reiterates that the Canadian housing market is key. “The Teranet-National Bank Home Price index fell 1.5% MoM in Oct after a record - 1.7% drop in Sept. These are record declines in data going back to 1999 and surpassing declines in 2008-09.” Also, real GDP data in Q3 saw a consumer spending contraction of -1.0% Q/Q, the first since Q2 2021 “underlining the fact that monetary tightening is impacting the economy. With global growth weakening, oil prices lagging and the US economy weakening, the CAD should underperform”. Any bright spots? Canada’s top export is crude oil (C$15.2bn in August 2022) and while oil prices have been substantially down forward-looking market sentiment is highly fickle – possibly overblown. Is the China Covid protest ‘effect’ – not to mention a new wave of COVID-19 – long-term or short? Wall Street appear to believe the former; JP Morgan and Goldman Sachs are predicting stronger oil price rises for 2023. Pent-up demand from China may come good. Also, Canada has upped oil and gas production by around 300,000 barrels a day in 2022 to support Europe’s pivot away from Russian energy. The clean hydrogen market for Europe is increasingly important and affordable as production costs generally have floated higher, tilting in Canada’s favour.

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    James Rauhm

    Closer to lunchtime DXY was 0.14% lower at 104.19; EUR/USD was 0.05% up at 1.0534 while GBP/USD had lifted 0.17% to 1.2283; USD/JPY slipped 0.96% lower to 134.02.

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