Canadian Dollar: BoC bets lift CAD against US Dollar – Scotiabank

USD/CAD is trading near 1.4054. Scotiabank strategists Shaun Osborne and Eric Theoret report that Alberta’s decisive rejection of separation and higher Oil prices are supporting the Canadian Dollar (CAD). Although Canadian inflation came in slightly below forecasts, markets are pricing in a greater risk of a Bank of Canada (BoC) rate hike next week following Governor Macklem’s recent remarks on energy-related inflation. Swaps imply around 20 bps of tightening, while Scotia expects a 25 bps increase.

CAD gains: Political support and rate expectations

"The initial results from Alberta indicate that voters rejected seeking to set in motion a binding independence referendum by a solid margin of 76/24%."

"Separatists will continue to advocate for independence in all likelihood, but the unequivocal margin of victory should help allay longer run sovereignty concerns. Canadian inflation data yesterday were modestly disappointing relative to forecasts."

"Headline inflation picked up slightly but the 0.1% M/M and 3.1% Y/Y report for September was a tenth below forecasts in both cases. Core measures remain subdued."

"However, comments from Governor Macklem over the past weekend, reflecting concern about the build up of energy-related inflation risks, have markets moving to price in greater risk of a rate hike at next week’s policy decision. Scotia is expecting a 25bps hike."

"Recall that Macklem has previously suggested that the Bank’s October forecast update could be decisive in determining whether tighter policy was warranted. Swaps are pricing 20bps of tightening risk now."

"Bearish - The CAD's technical condition continues to improve, with spot moving to a minor new cycle low this morning, extending USD losses below 1.41 and putting the 50% retracement of the USD’s September rally at 1.4030 well within reach."

"Note that the 40- and 100-day MA signals converge near 1.4045 currently and a break below this area may be a more meaningful signal that CAD gains can extend in the short run, potentially towards the mid-1.39s. Intraday resistance is 1.4070, with 1.4115 likely to represent firmer resistance to a USD rebound."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)