Canadian Dollar Forecast: USD/CAD Drop Supported By Crude Oil, Will BoC Disappoint?

The Canadian Dollar’s strength in recent days slowed heading into the final full trading week of October. Still, that leaves it around its average most expensive price against the US DollarJapanese YenBritish Pound and Euro since June. Is momentum slowing for a good reason? Or could the dominant uptrend resume in the week ahead?

The Loonie appears to have been benefiting from rising global inflation expectations as commodity prices, especially energy, continued appreciating. WTI sits around levels last seen in late 2014. The commodity is a key Canadian export, which can impact local inflation and thus monetary policy. Last week’s CPI data showed headline price growth at 4.4% y/y versus 4.3% anticipated. That was the most since 2003.

Following the inflation data, all eyes turn to the Bank of Canada rate decision on Wednesday. The BoC is expected to maintain benchmark lending rates unchanged at 0.25%. However, the pace of local bond purchases is expected to be lowered to CA$1 billion from CA$2b. This is as traders price in about 3 rate hikes by the end of next year – see chart below.

The aggressive pace in hawkish BoC policy expectations since the middle of September could open the door to cautious disappointment this week. This could especially be the case if the central bank continues to view recent inflationary trends as transitory. Still, it might not be enough to offset the underlying fundamental forces supporting the Canadian Dollar as of late.

The gradual reopening of countries as nations move past the Covid pandemic may continue supporting energy prices as OPEC and it allies struggle to meet production targets. At times, the Canadian Dollar can also follow risk trends, leaving it vulnerable to deteriorating sentiment. All eyes are on US earnings, where prominent tech companies – like Amazon, Apple and Facebook – will report. Misses similar to Snap Inc. and Intel could amplify risk aversion, leaving the Loonie at risk (INTC, FXC, SNAP).

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