March 1, 2022 15:10:04
The Bank of Canada is fully expected to raise rates by 25bps for the first time in this tightening cycle at its meeting tomorrow. Of course, increased geopolitical risk following the Russian offensive into Ukraine will loom over policymakers’ decision making. So too will rising energy costs as WTI crude hits $100 again and stock market volatility remains elevated.
Current conditions look to be playing out for the bank with recent inflation data above expectations at 30-year highs and strong house price data. Focus will be on the language used though we note that the bank isn’t a big fan of forward guidance when rates are no longer at their lower bound.
A series of rate hikes are priced in by markets this year with CPI expected to run well above its target going forward. Whether the Ukrainian conflict influences policymakers at this stage is doubtful, but they may well acknowledge the profound uncertainty in Europe. This could impact on the current hawkish market pricing and hurt the CAD. The announcement of the end of balance sheet reinvestments is not expected.
USD/CAD moves to lower part of recent range
The loonie has been surprisingly well supported recently. Sure, oil prices and gains in other commodities are rising strongly. But weak stock markets and the VIX above 30 would normally provide more of a headwind. Investors are also turning to the US dollar for its safe haven status.
USD/CAD spiked higher on the Russian moves on Thursday to a high at 1.2877. The recent four-week range looked to have been decisively broken but buyers couldn’t sustain prices above 1.28. CAD has since posted two solid days of gains with trend momentum indicators signalling a move to the bottom of the range. This comes in around the 100-day SMA at 1.2634 and the Fib level (38.6%) of the December to January move at 1.2648. The 200-day SMA is at 1.2560.
Resistance sits at 1.2708, the halfway point of that high to low move. The next Fib level (61.8%) is at 1.2768 which is near the top of the recent range.
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