Canadian Dollar (CAD) Strength Underpinned by Rate Hike Expectations

Canadian Dollar Price, Chart, and Analysis

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Bank of Canada (BoC) governor Tiff Macklem suggested in an article yesterday that interest rate hikes are getting nearer, further strengthening an already strong Canadian dollar. The market had previously priced in the first 0.25% hike for April next year, but this has now been nudged forward and been fully priced in for March 2022. The latest market rate expectations are for a total of five 0.25% rate hikes over the course of next year. In a recent article, Governor Macklem re-fueled the recent rally in the Canadian dollar, saying that the central bank would not raise rates until economic slack is absorbed, before adding ‘we are not there yet, but we are getting closer’. With the governor signaling that the economy is picking up, and with Canadian inflation continuing to run hot – 4.4% in September – rate hikes are rightly being priced-in.

This tightening of monetary policy has pushed the Canadian dollar ever higher against a range of currencies, including the US dollar, another currency that has had interest rate hike expectations bought forward. The daily USD/CAD chart shows the one-point sell-off over the last couple of days pushing the pair down to 1.2530 and back towards a cluster of old lows that should provide short-term support around 1.2375-1.2385.

Canadian Dollar (USD/CAD) Daily Price Chart November 16, 2021

Retail trader data show 68.87% of traders are net-long with the ratio of traders long to short at 2.21 to 1. The number of traders net-long is 18.91% higher than yesterday and 19.56% lower from last week, while the number of traders net-short is 13.35% lower than yesterday and 7.77% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.

Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.

The re-pricing of rate hikes in Canada over the recent weeks, and the insistence by the ECB that they are not hiking rates in 2022 – despite money markets indicating a 10bp increase next year – can be seen in EUR/CAD which is now back at levels last seen in April 2017. The weekly chart shows that the multi-year trend of higher highs and higher lows has been broken, casting a longer-term bearish shadow over the pair. The chart suggests that the next level of reasonable support is around 1.3784, around five points below the current spot price.

Canadian Dollar (EUR/CAD) Weekly Price Chart November 16, 2021

What is your view on the Canadian Dollar – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.