USD/CAD continues to trade sideways this week. In the Wednesday session, the pair is trading at 1.2444 up 0.08% on the day. On the release front, all eyes are on the Bank of Canada, which is expected to announce a rate hike. The BoC will also release its quarterly monetary report, and BoC Governor Stephen Poloz will host a press conference. In the US, there are major releases. On Thursday, there are a host of key indicators out of the US, led by Building Permits and unemployment claims.
Will he or won’t he? Most experts are predicting that Governor Stephen Poloz will raise rates by 25 basis points, from 1.00% to 1.25%. Even if the BoC raises rates, Poloz could turn the move into a ‘dovish hike’, if he emphasizes that future rates will be data-dependent. The BoC last raised rates in September, marking a third rate hike in 2017. The Canadian economy has looked strong of late, underscored by unexpectedly strong employment data. At the same time, Poloz has some concerns about the economy, particularly looming dark clouds over NAFTA. The free-trade agreement, crucial to the Canadian economy, is in trouble, as US President Trump has threatened to cancel the pact unless Mexico and Canada make major concessions to the US. If the agreement is terminated, the Canadian dollar would likely take a tumble.
The markets are keeping one eye on the Federal Reserve, which holds its next policy meeting on January 31. A rate hike is a virtual certainty, with CME Fed Watch pegging the odds of a quarter-point hike at 98.5%. Although this means that a rate hike has been priced in by the markets, the dollar could nevertheless gain ground after a hike, as a rate increase would signify an important vote of confidence in the economy by the Fed Reserve. If the US economy continues to expand at a c clip of around 3 percent, there is a strong likelihood of another rate hike in the first half of 2018.
