Attention turns to domestic factors this week as the Bank of Canada is set to make its rate announcement and release its quarterly Monetary Policy Report. The focus for the Canadian dollar will be how the bank addresses inflation. In particular, how will the Canadian central bank address the inflationary pressures that have manifested in the last six months in the Canadian economy and globally? The Bank’s current position is that the recent bout of inflationary pressure is transitory. As such, the Bank has argued that there is no need to use rate hikes to tame inflation and that it does not expect the first rate hike to occur until the second half of 2022. The markets are pricing in something different; one or possibly two rate hikes in the first half of 2022. If the Bank of Canada does not move closer to market expectations, you can expect a material move down in the loonie. On the other hand, if the Bank of Canada does change its view about inflationary pressures and moves up its date for rate hikes, as the market expects, you can expect some further strengthening of the loonie. The Canadian currency gained about 3% in the first half of October as oil rallied and general market optimism prevailed. Since the middle of the month, it has been rangebound. This morning, the Canadian dollar is on the weaker end of that recent range despite the fact that oil has hit another multi-year high. A broadly stronger US dollar is drowning out any benefit from this morning’s move up in oil prices. USD to CAD is currently at 1.237 (CAD to USD is at 0.808).
