The Canadian dollar (CAD) is poised for potential gains, especially if the Bank of Canada's impending policy rate decisions, likely influenced by robust economic indicators, result in a surprise rate hike and policy reconvergence.
Bank of Canada's Policy Rate Steady But Rate Hike on Horizon
According to Brian Daingerfield however, Head of G10 FX Strategy at Natwest, the Bank of Canada (BoC) is likely to hold its policy rate steady at 4.50% at their next meeting on June 7th.
"We expect no change in the Bank of Canada (BoC) policy rate at the June 7th meeting. Since pausing at the January meeting, the economic outlook has remained resilient and services CPI has shown signs of reaccelerating," he states. Daingerfield adds that there is a strong case for a rate hike at one of the BoC's next two meetings, most likely in July.
According to their research, the recent economic data indicates the need for additional monetary tightening.
"In our view, the data are now showing evidence that additional tightening is needed. On the labour side, April’s job data showed a market still in excess demand with an unemployment rate of 5.0% (unchanged since December) and hourly wage growth of 5.2% y/y," he says.
Additionally, the analyst points out that first quarter GDP came in quite strong, exceeding both market expectations and BoC's projection.
Canadian CPI data for April revealed higher-than-expected figures, contributing to the case for tightening.
Daingerfield elaborates, "On inflation, Canada CPI came in stronger-than-expected on both the monthly and annual headline figures for April. While the bank’s key measures of core inflation have been relatively stable on short-term aggregates, the services category has sharply accelerated on a 3-month annualized basis."
However, the analyst notes that BoC Governor Macklem seemed to take a more relaxed view of the data, hinting that the Bank may not be ready to abandon its rate pause just yet.
Implications for the Canadian Dollar
The recent strength of the USD has had a significant impact on the Canadian dollar (CAD), which Daingerfield views as a high-beta USD currency, closely tracking US data and the Fed.
"In recent weeks and months, the USD tide has continued to act as a driving force for the Canadian dollar, and as the USD has found its footing the CAD has rallied on crosses in lockstep with the USD," he observes.
However, the analsyt suggests that strong domestic data, particularly April's CPI and first-quarter GDP, introduce risks to this trend.
Return to Tightening Cycle Likely to Boost CAD
Daingerfield believes that a return to the tightening cycle by the BoC could be beneficial for the CAD, especially given its lagging position relative to its G10 peers.
"A rate hike would return the BoC to the tightening pack given that it was the first major central bank to announce a pause to its rate hiking cycle on January 25th," he says.
Daingerfield also speculates that a hawkish statement in June or a surprise rate hike could act as tailwinds supporting the CAD's performance against the USD and other currencies.
Bank of Canada's Policy Rate Steady But Rate Hike on Horizon
According to Brian Daingerfield however, Head of G10 FX Strategy at Natwest, the Bank of Canada (BoC) is likely to hold its policy rate steady at 4.50% at their next meeting on June 7th.
"We expect no change in the Bank of Canada (BoC) policy rate at the June 7th meeting. Since pausing at the January meeting, the economic outlook has remained resilient and services CPI has shown signs of reaccelerating," he states. Daingerfield adds that there is a strong case for a rate hike at one of the BoC's next two meetings, most likely in July.
According to their research, the recent economic data indicates the need for additional monetary tightening.
"In our view, the data are now showing evidence that additional tightening is needed. On the labour side, April’s job data showed a market still in excess demand with an unemployment rate of 5.0% (unchanged since December) and hourly wage growth of 5.2% y/y," he says.
Additionally, the analyst points out that first quarter GDP came in quite strong, exceeding both market expectations and BoC's projection.
Canadian CPI data for April revealed higher-than-expected figures, contributing to the case for tightening.
Daingerfield elaborates, "On inflation, Canada CPI came in stronger-than-expected on both the monthly and annual headline figures for April. While the bank’s key measures of core inflation have been relatively stable on short-term aggregates, the services category has sharply accelerated on a 3-month annualized basis."
However, the analyst notes that BoC Governor Macklem seemed to take a more relaxed view of the data, hinting that the Bank may not be ready to abandon its rate pause just yet.
Implications for the Canadian Dollar
The recent strength of the USD has had a significant impact on the Canadian dollar (CAD), which Daingerfield views as a high-beta USD currency, closely tracking US data and the Fed.
"In recent weeks and months, the USD tide has continued to act as a driving force for the Canadian dollar, and as the USD has found its footing the CAD has rallied on crosses in lockstep with the USD," he observes.
However, the analsyt suggests that strong domestic data, particularly April's CPI and first-quarter GDP, introduce risks to this trend.
Return to Tightening Cycle Likely to Boost CAD
Daingerfield believes that a return to the tightening cycle by the BoC could be beneficial for the CAD, especially given its lagging position relative to its G10 peers.
"A rate hike would return the BoC to the tightening pack given that it was the first major central bank to announce a pause to its rate hiking cycle on January 25th," he says.
Daingerfield also speculates that a hawkish statement in June or a surprise rate hike could act as tailwinds supporting the CAD's performance against the USD and other currencies.