On Wednesday at 14:00 GMT, the BoC will decide on monetary policy, with market participants raising bets of a 75bps hike after the inflation numbers for September, despite economists’ consensus staying at 50bps. However, the size of the rate hike may not be the only focal point. Investors may also be eager to find out how officials are planning to move forward.
Inflation revives bets of a 75bps hike
At its September meeting, the BoC raised interest rates by 75bps, refraining from verifying expectations of a slower path from there onwards. However, with data showing inflation decelerating notably in August, traders have brought down their rate-path projections. Just before the September CPI numbers, they were expecting a 50bps hike at next week’s gathering, and only two more quarter-point increments thereafter.
Inflation slowed further in September, but by less than anticipated, with the core rate rising and the trimmed mean and median rates staying unchanged. This implies that the slide in the headline rate was mainly due to volatile items like energy and suggests that, like in the US and the UK, inflation in Canada is also becoming stickier. Ergo, market participants brought back bets of a 75bps hike, with the terminal rate being lifted by around 25bps.
Economy stays soft but will the BoC care?
Besides the CPIs, other data since the last meeting has been pointing towards a bleak economic outlook. The monthly GDP rate exited the negative territory in July, rebounding from -0.1% to +0.1%, but retail sales shrank 2.5% m/m during that month. As for the labor market, although it gained 21.1k jobs in September, it was after losing a sum of 113.5k during the summer months.
Although these numbers make a 50bps hike look as the safest choice, a few days ago BoC Governor Tiff Macklem said that he has not changed his mind on interest rate hikes, even as expectations grow about a possible recession next year. That’s maybe why investors did not hesitate to raise bets over a 75bps hike immediately after the latest CPI numbers.
Loonie destined to stay in downtrend against the dollar
Another triple hike could support the Canadian dollar initially, but for the currency to record decent gains, officials may need to sound hawkish with regards to their future course of action as well. Otherwise, hints that they will proceed slower compared to current market expectations could force the currency to give back its hike-related gains. Now in case policymakers decide to proceed with a 50bps hike, it could come under selling interest instantly.
Having said all that though, even in the case of a 75bps hike accompanied by a hawkish language, a bearish trend reversal in dollar/loonie seems unlikely. With market participants now expecting the Fed to raise interest rates to 5% by March and the Canadian dollar being subject to changes in the broader market sentiment, the pair may be destined to continue trending higher. Although Canada is a major oil producing and exporting nation, dollar/loonie has been more linked to the S&P 500 rather than to changes in oil prices. Therefore, with an aggressive Fed expected not only to support the dollar further, but to weigh on equities as well, any decision-related slide in the pair could be seen as just a corrective move within the broader uptrend.
What does the technical picture say?
Such a correction could meet buyers at around the 1.3650 zone or even lower, near the trough of October 5th, at 1.3500. If so, a rebound could aim for another test at the peak of October 13 at 1.3980, the break of which would take the pair into territories last seen back in May 2020, The next resistance may be the high of May 14 at 14135, but if the bulls are not willing to stop there, they may put the 1.4265 zone under their radar, marked by the high of April 21 of that year.
For the bears to gain the upper hand in the near term, a break below 1.3500 may be needed. This would confirm the completion of a non-failure swing top and could open the way towards the 1.3225 zone, defined as a support by the low of September 20 and the inside swing high of July 14.
