The Bank of Canada (BoC) will announce its rate decision on Wednesday at 1500 GMT, and expectations are for policymakers to take no action. The loonie will probably be driven by any signals regarding the likelihood of a rate hike at the next meeting, in January. Beyond monetary policy, the outcome of the OPEC gathering on Thursday may also prove crucial for the currency, via its impact on oil prices.
The BoC is widely anticipated to keep interest rates unchanged this week, with the market-implied probability for a rate increase resting at a marginal 3%, according to Canada’s overnight index swaps. Assuming no surprises on the decision itself, the focus will quickly shift to the accompanying statement for any signals on whether a rate hike in January is still on the cards; something currently priced in with a 68% probability.
The past few weeks have been particularly interesting for the loonie. The currency was unable to rally even after the BoC assumed a more confident tone at its October meeting, mainly because oil prices started to collapse at around the same period. Canada is a major oil producing economy, so fluctuations in crude prices have a substantial impact on the loonie. Alas, oil rebounded notably this week, allowing the currency to recover some lost ground. Notice that although still weak, the correlation between the two has strengthened lately, which implies moves in crude are becoming an increasingly important factor for the loonie.
Blending the two together, the BoC’s broader tone – whether confident or not – may hinge largely on how policymakers interpret the recent plunge in oil, especially since economic data have been mixed recently. Even accounting for the latest rebound, crude prices are still a whopping 18.5% lower than they were at the BoC’s latest meeting, which paints a bleak picture for growth and business investment going forward. Hence, the real question is whether the Bank will view crude’s latest breakdown as a transitory factor that will dissipate soon, or as a longer-lasting development that warrants an appropriate policy response.
It’s a close call, but the risks may be tilted towards a slightly more cautious-sounding narrative. Looking at this through the BoC’s eyes, you cannot know whether this shock will ultimately prove transitory or not, so a more measured policy approach – that allows you to slow down if things worsen – is likely prudent at this stage. That being said, the risk is that Governor Poloz and his colleagues may prefer to see what effect this will have on the actual data first, before appearing concerned.
The other key event will be Thursday’s OPEC meeting, where expectations are for a fresh round of production cuts to stabilize prices. The magnitude of any cut will be key; market chatter suggests a reduction of 1-1.5 million barrels per day (bpd). Anything near the upper bound of this range may help oil prices recover further, while anything below it could bring them under renewed selling interest.
Technically, another wave of declines in dollar/loonie may encounter immediate support near 1.3155, an area defined by the December 3 lows. A downside break could open the way for a test of the November 7 lows at 1.3050, before the October 24 trough of 1.2965 comes into view.
On the flipside, advances in the pair may stall around the 1.3250 zone, marked by the inside swing low of November 29. Even steeper bullish moves could encounter resistance at 1.3315; the territory around this level was congested recently.
