Insight: Bank of Canada Governor Macklem stated over the weekend (17th) that, given persistently high crude oil and petroleum product prices, he expects the central bank may significantly raise its quarterly inflation forecast when announcing interest rate decisions on the 28th of this month. Data shows that Canada's CPI year-on-year growth rate in September was 3.1%, slightly higher than 3% in August, and marginally exceeding the central bank's inflation target range of 1% to 3%. Since the Middle East conflict appears unlikely to subside in the short term, global energy prices and inflation levels may remain elevated, which could be one of the reasons behind Macklem's remarks.
*Market estimates of BoC rate hike probability this month rise to 80%*
Another noteworthy factor is that Canada's current interest rate stands at only 2.25%, higher solely than Switzerland's zero rate and Japan's 1.25% among major currencies. Such a rate level is insufficient to effectively curb inflation exceeding 3%, which might also explain why the Bank of Canada has recently signaled a potential rate hike. According to changes in interest rate futures prices, the market currently estimates an 80% probability of a rate hike by the Bank of Canada at its meeting on the 28th of this month; before Macklem's remarks, the expected probability was only about 30%, representing a significant increase.
*Alberta independence referendum failure supports Canadian dollar stability*
Additionally, political factors cannot be overlooked. Alberta, Canada's oil hub, held a referendum on Monday (19th) on seceding from the Canadian federation. Although the referendum result is non-binding, its passage could have exacerbated political instability in Canada. Fortunately, the referendum failed, providing temporary relief for Canada. Although the Alberta independence issue has been temporarily settled, ongoing trade disputes between the U.S. and Canada remain significant. Markets are currently watching whether the Republican Party, to which U.S. President Trump belongs, will lose control of both the Senate and House of Representatives in the midterm elections on November 3. If Republicans lose control of both chambers, it is imaginable that the Trump administration's ability to pressure Canada on trade would greatly diminish, which would undoubtedly be favorable for the Canadian dollar.
*The Bank of Canada's implicit message behind hinting at a rate hike*
Although the Bank of Canada's inflation target range is 1% to 3%, with a midpoint of 2%, Canada's inflation rate has actually remained above this level since March this year. However, facing continuous trade pressure from the U.S. and political uncertainty from Alberta, the Bank of Canada has previously hesitated to propose rate hikes rashly, to avoid further burdening the domestic economy. Now that the central bank has the confidence to hint at a rate hike, it likely reflects, to some extent, the Bank's outlook on the U.S. midterm elections.
Currently, the interest rate futures market still maintains an 80% expectation of a rate hike by the Bank of Canada, indicating that the market has not fully priced in a hike, possibly due to the unclear outcome of the U.S. midterm elections. However, if Republicans fail to retain control of both chambers, the market may further increase expectations for a rate hike by the Bank of Canada in December (Note: The Bank of Canada has no rate-setting meeting in November).
*Canadian dollar eyes 1.3650 against the U.S. dollar, key focus on U.S. midterm elections*
Indeed, the outlook for the Canadian dollar still involves considerable uncertainty. However, considering that current NY crude oil futures prices are above $100 while the Canadian dollar exchange rate remains at a relatively low level over the past two decades, the Canadian dollar possesses certain appeal. If Trump suffers defeat in the midterm elections, the Canadian dollar may test resistance at 1.3650 against the U.S. dollar, with support expected around 1.43 against the U.S. dollar.
*Articles published in Economic Daily, whether signed or unsigned, represent the personal opinions of the authors and do not necessarily reflect the stance of Economic Daily. Economic Daily's role is to provide a free platform for expression.
*Market estimates of BoC rate hike probability this month rise to 80%*
Another noteworthy factor is that Canada's current interest rate stands at only 2.25%, higher solely than Switzerland's zero rate and Japan's 1.25% among major currencies. Such a rate level is insufficient to effectively curb inflation exceeding 3%, which might also explain why the Bank of Canada has recently signaled a potential rate hike. According to changes in interest rate futures prices, the market currently estimates an 80% probability of a rate hike by the Bank of Canada at its meeting on the 28th of this month; before Macklem's remarks, the expected probability was only about 30%, representing a significant increase.
*Alberta independence referendum failure supports Canadian dollar stability*
Additionally, political factors cannot be overlooked. Alberta, Canada's oil hub, held a referendum on Monday (19th) on seceding from the Canadian federation. Although the referendum result is non-binding, its passage could have exacerbated political instability in Canada. Fortunately, the referendum failed, providing temporary relief for Canada. Although the Alberta independence issue has been temporarily settled, ongoing trade disputes between the U.S. and Canada remain significant. Markets are currently watching whether the Republican Party, to which U.S. President Trump belongs, will lose control of both the Senate and House of Representatives in the midterm elections on November 3. If Republicans lose control of both chambers, it is imaginable that the Trump administration's ability to pressure Canada on trade would greatly diminish, which would undoubtedly be favorable for the Canadian dollar.
*The Bank of Canada's implicit message behind hinting at a rate hike*
Although the Bank of Canada's inflation target range is 1% to 3%, with a midpoint of 2%, Canada's inflation rate has actually remained above this level since March this year. However, facing continuous trade pressure from the U.S. and political uncertainty from Alberta, the Bank of Canada has previously hesitated to propose rate hikes rashly, to avoid further burdening the domestic economy. Now that the central bank has the confidence to hint at a rate hike, it likely reflects, to some extent, the Bank's outlook on the U.S. midterm elections.
Currently, the interest rate futures market still maintains an 80% expectation of a rate hike by the Bank of Canada, indicating that the market has not fully priced in a hike, possibly due to the unclear outcome of the U.S. midterm elections. However, if Republicans fail to retain control of both chambers, the market may further increase expectations for a rate hike by the Bank of Canada in December (Note: The Bank of Canada has no rate-setting meeting in November).
*Canadian dollar eyes 1.3650 against the U.S. dollar, key focus on U.S. midterm elections*
Indeed, the outlook for the Canadian dollar still involves considerable uncertainty. However, considering that current NY crude oil futures prices are above $100 while the Canadian dollar exchange rate remains at a relatively low level over the past two decades, the Canadian dollar possesses certain appeal. If Trump suffers defeat in the midterm elections, the Canadian dollar may test resistance at 1.3650 against the U.S. dollar, with support expected around 1.43 against the U.S. dollar.
*Articles published in Economic Daily, whether signed or unsigned, represent the personal opinions of the authors and do not necessarily reflect the stance of Economic Daily. Economic Daily's role is to provide a free platform for expression.
