The Canadian dollar is a good example of a currency that has a bullish outlook, but may not be pushing higher in the short term. Why? This is because quite a lot of the good news for CAD has already been priced in. At the last Bank of Canada meeting on Oct 27, the BoC left rates on hold, but they ended QE and brought rate guidance forward to the middle quarter of 2022 from sometime in the second half of 2022. This move was supportive for the CAD. However, if you take a look at the CAD below you can see that in the run-up to the meeting.

So, today we have the CAD CPI print and it will be interesting to see if Canada’s follows the recent surge higher in US inflation. Expect any spikes higher to lift the CAD as expectations will increase for a sooner BoC rate lift-off.

The balancing act

The best way to see the CAD right now is to think of it as a balancing act between oil, global risk tone, and central bank policy.

Oil

Canada’s economy is strongly influenced by its oil exports. A rising oil price lifts CAD and vice versa. The recent pullback in oil prices does not help the CAD. In particular, look out for the US releasing its strategic reserves to push oil prices down. The only problem with this is that this can backfire on the US. The more oil they release, the more they have to eventually buyback. So, watch out for dip buyers after an immediate drop in oil on this news.

Risk tone

The broader risk tone impacts CAD. If the risk is on then the CAD, NZD, & AUD tend to gain. If the refutation trade returns in earnest then expect the CAD to benefit just like it has done earlier in the year. The current stagflationary fears are hindering those gains right now.

The bottom line?

The bottom line is this: CAD has a medium-term bullish outlook, but a lot of the good news has already priced in. However, movements in oil prices and the global outlook will also influence CAD, so keep tabs on the big picture.