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Canadian Dollar Weekly Outlook: Bearish

• The Canadian dollar appears to be well-supported in 2022 relative to other commodity currencies.
• The rise in the oil price may not explain its outperformance as the petro-minded Norwegian krone lags behind.
• The rates outlook is likely to be key, in-line BOC may leave room for deeper pullback.

The Canadian dollar has fared considerably better than other commodity-linked currencies so far this year, despite a sour market mood. The so-called loonie is tracking second only to its US counterpart among the G10 FX currencies, pulling ahead of the similarly sentiment-geared Australian and New Zealand dollars.

Elevated crude oil prices might be a tempting explanation for this outperformance. Russia’s invasion of Ukraine disrupted critical supply routes and sent energy costs higher, driving windfall capital into the hands of top exporters, including in Canada. The similarly oil-linked Norwegian krone lagged vastly behind, however.

The Canadian Dollar Up Against the Australian Dollar, the New Zealand Dollar, and the Norwegian Krone Year-To-Date (Weekly Chart)

Chart crated with TradingView

Canadian dollar resilience would nevertheless be tested amid an up-swell of worries about oncoming recession in recent weeks. Economists marked down global GDP forecasts for 2023, several large companies like Target and Walmart issued ominous guidance, and traders marked down central bankers’ appetite for rate hikes.

The rate hike path priced out for the Bank of Canada (BOC) was no different, edging lower in tandem with the local unit. The currency has shed 1.3% against an average of its major counterparts over the past two weeks. How this part of the story develops seems central to how price action will evolve from here.

The Canadian Dollar Down for Two Weeks Against Top Currency Counterparts (Weekly Chart)

Chart crated with TradingView

Canadian Dollar May Lose Ground as BOC Delivers on Expectations

GDP data is first to be in the spotlight. It is expected to show that output grew at an annualized pace of 5.2% in the first three months of the year, down from 6.7% in the fourth quarter. A policy announcement from the BOC is likely to be the main event, however, and any substantive moves will probably wait for it.

The central bank is expected to deliver at least a 50 basis point (bps) rate hike. What’s more, the markets price in a nearly even probability of a larger 75 bps rise. With such heady outcomes already factored in, engineering a hawkish surprise might be somewhat difficult.

With that in mind, even delivering at baseline may register as something of a disappointment against the backdrop of broad-based growth concerns. Absent a fresh injection of unmistakably hawkish rhetoric, the priced-in rate hike path may soften a bit more at the longer end, pressuring the Canadian dollar downward.