This month, the Canadian dollar has declined in value against the US dollar. This is despite the expected rate increase by the BOC and the deal between the US, Canada, and Mexico. In the month, the USD/CAD pair has moved from 1.2780 to a monthly high of 1.3133, an almost 3% increase.
Today, the Bank of Canada will release its interest rate decision and it is widely expected that it will hike rates to 1.75%. This will be the second time the bank has raised rates this year.
Canadians have braced for higher interest rates. A report published yesterday showed that a third of Canadians are fearing about private bankruptcy as rates increase. This was a 6 percent increase from a similar survey that was carried out in June. In recent months, there have been concerns from economists that increased debt by Canadians exposed the economy to risk. However, the 25 basis hike by the BOE will not be very difficult for most people. For example, if you have a $400,000 20-year mortgage with a 3.5% interest rates, the 25 basis points increase will mean an additional $50 per month. However, this will increase to $200 if the BOC continues to increase rates as expected in 2019.
Today’s interest rate hike comes a few days after Statistics Canada released the CPI numbers for September. The numbers showed that that the rate of inflation increased by a slower rate than traders had expected. The 2.3% increase was lower than the expected 2.7%. The retail sales data also missed analysts’ forecasts.
However, even with the disappointing numbers, the rate hike is still expected. Yesterday, analysts at Goldman Sachs said that they expect the USD/CAD pair to reach 1.2500 level in three months. This will be significantly lower than where the pair currently is. The analysts said:
“Despite the latest miss on retail sales and CPI, the broader macro picture still looks encouraging and our economists expect the BoC to hike rates at the next policy meeting on 24 October. Even though a 25bp hike is nearly fully priced and softer headline inﬂation probably gives the Governing Council more comfort in raising rates only gradually, the economic projections in the Monetary Policy Report seem most likely to be revised a bit higher, primarily due to a smaller drag on the outlook from trade policy uncertainty on the USMC deal announcement.
Despite less conviction on the tone from the BoC this week, we continue to see scope for CAD outperformance vs USD over the next 3 months as more hikes get priced in for 2019-barring any persistent shifts in activity or inﬂation data-and short positioning sets up for potential unwinds on any positive policy or data surprises.”
The USD/CAD pair has been gaining this month as the Loonie lost against the USD. While the projection by Goldman Sachs is ambitious, there is a likelihood that the pair will move in the downward direction. This will largely depend on the US mid-term elections and the Federal Reserve. In the US, if the democrats win the house and the senate, there is likely to be some opposition to Trump’s deal with Canada.
In addition, there is a likelihood that the Fed will be swayed by Trump’s comments. Yesterday, he increased the pressure by accusing the Fed of working against his agenda.