USD/CAD. Will the Bank of Canada raise the rate in January?

On Wednesday, the Bank of Canada will hold its first meeting this year. On the eve of this event, the Canadian dollar shows quite strong volatility, although the primary reason here is the strengthening of the oil market. But the January meeting may also shake up the markets, because, according to many experts, the regulator will raise the interest rate to two percent, continuing the cycle of tightening monetary policy.


However, not everyone agrees with this forecast – some analysts warn that the central bank may take a wait-and-see position in January, while improving its forecast on the dynamics of key economic indicators. In their perspective, there are several reasons for this scenario. First, despite the growth of quotations of "black gold", oil is still at quite low levels. At the moment, a barrel of Brent crude oil is trading at $58, while last year (before the November fall) the price fluctuated in the range of $70-85 per barrel. The current trend is associated with the weakening of the US currency against the background of the post-holiday situation around risky assets.

However, many problems of the oil market have not disappeared. First of all, we are talking about an overabundance of production against the background of the "half-hearted" results of the last OPEC+summit. The compromise reached was not enough for the impulse growth of oil prices: according to most experts, it was necessary to reduce production by 1.7-2 million barrels per day, while the participants of the meeting decided to agree on a more modest figure – 1.2 million b/d. Therefore, according to some experts, the current trend of growth of oil prices is temporary, where the likely price "ceiling" is around 60-65 dollars per barrel. The Bank of Canada, in turn, can observe the further dynamics of the oil market, given that the next meeting of the regulator will be held on March 6.

In addition, skeptics recall that the latest data on the growth of Canadian inflation were quite weak. And the regulator will also take this factor into account when making the next decision. Thus, on a monthly basis, the consumer price index fell to a negative area in November, reaching -0.4%, and in annual terms decreased to 1.7%, which is the weakest result since January this year. The commodity price index, which is a leading indicator of price pressure in the country, has also significantly decreased. This indicator updated the annual low and collapsed in November by 11%. Along with it, the producer price index fell for the first time since August last year, falling into a negative area. In addition to the above, we should not forget about the slowdown in Canada's GDP growth – by 0.1% after the seven-month growth cycle.


Thus, the Bank of Canada has every reason to take an "extra minute" for reflection on Wednesday, postponing the issue of raising rates until spring. Supporters of tightening monetary policy point to strong enough data on the labor market in Canada, which were published last Friday. Indeed, "Canadian Non Farms" pleasantly surprised: contrary to the negative forecast, the unemployment rate remained at a record low of 5.6%, and the number of employees increased by 9 thousand (with a forecast of 6.3k). And although in November this increase amounted to 94 thousand, the current result can not be considered a failure: the slowdown in hiring after the strongest growth in employment over the past 8 years was very expected. There was a noticeable increase in part-time employment – the figure came out at the level of 28 thousand, updating the multi-month high. The dynamics of the average hourly wage growth did not disappoint either.

But in my opinion, even such figures will not be able to convince the members of the Canadian central bank. And although the basic scenario provides for an increase in the rate to 2%, many traders doubt its implementation. The dynamics of inflation and GDP growth, as well as the vague prospects of the oil market, should alert the members of the Bank of Canada in some way – at least in the context of making hasty decisions. Therefore, at the moment it is impossible to talk about raising the rate at the January meeting as "almost a fait accompli". Yes, at its last meeting, the Bank of Canada said that the rate is still below the neutral level (that is, the range of 2.5%-3.5%), but the regulator still softened the tone of its rhetoric. After a five-fold increase, the central bank said that its further steps will be "gradual".


Therefore, the short positions of USD/CAD should be treated with extreme caution, despite the weakening of the US currency. If the Canadian regulator makes an "unpopular" decision on Wednesday, that is, leaves the rate at 1.75%, the pair will demonstrate an impressive corrective pullback - at least to the level of 1.3470 (the average line of the Bollinger Bands indicator on the daily chart). If the central bank still dares to tighten monetary policy, the "loonie" will continue the southern dynamics with the first target at 1.3250 (the lower line of the Bollinger Bands on the same timeframe).

The material has been provided by InstaForex Company -