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Loonie Strengthens Ahead Of January Rate Hike

Loonie strengthens ahead of January rate hike

Later today the Bank of Canada (BoC) will announce its December interest-rate decision: we think it will remain unchanged, but a climb is likely in January. USD/CAD has tracked front-end yield spreads tightening in the last six months. With a US Federal Reserve December rate hike priced-in and a hawkish BoC, a USD/CAD reversal from 1.29 resistance presages a deeper correction towards 1.2566 (100-day moving average).

Q3 economic data surprised to the upside. Labour markets exceeded expectations, demand was strong, and the prospect of US tax reform could accelerate Canadian growth and reduce risk of the North American Free Trade Agreement falling apart. The BoC is likely to hike rates steadily, in a gradual process.

Brazilian real to weaken

As Brazil’s central bank is expected to drop its prime lending rate to an all-time low of 7%, and demand for the USD rises with the US Federal Reserve’s impending rate hike, the real should continue to weaken against the greenback. Since the start of the year, the USD/BRL has been trading between 3.1 and 3.4. Brazilian rates have fallen by half in the past year, and 2018 might see further cuts. Capital outflows are likely to accelerate, as the interest-differential to the USA narrows.

The interest rate cut is driven by inflation, which surprisingly stands way below the official target. Banco Central do Brasil is targeting inflation at 3-6%, yet consumer prices have dived from double digit to less than 2% growth. Inflation for November is expected to print at 2.88% annually.

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