At the Bank of Canada’s last rate meeting, the CAD lost value as market participants focused on the pessimism surrounding future growth. Today we have the Canadian CPI print and if this shows a low reading, below market’s minimum expectations, this could be a good opportunity for more CAD weakness.
Why a miss is a better opportunity
The Federal Reserve is expected to hike rates this year. The Fed fund futures had a pricing for four 0.25 bps rate hikes this year. The market has taken the move from the Fed as s support for the world’s major central banks to also raise their interest rates. The current expectations are for the BoC to hike rates next week. Interest rate derivatives are actually pricing in 6 rate hikes for the BoC this year. So, a beat on expectations is unlikely to produce much of a reaction because the current expectations are very hawkish.
However, if CPI is a big miss today that will be a better opportunity as we may see some of the aggressive rate hike expectations unwind.
The oil factor
Oil keeps moving higher on a combination of unrest, low inventories, and expectations of returning demand on a milder Omicron. Higher oil prices is a big support for CAD prices. So bear that in mind. The best opportunity on a missed CPI print will also be if we see oil prices start to fall. Typically, falling inflation expectations is a negative for oil, so many economists and analysts do see oil returning to lower prices in the medium term. However, the recent strength has been noteworthy, so there does warrant caution around being too specific on the medium-term outlook for oil. The tail risk is that underinvestment in oil infrastructure (due to a green energy pivot) leads to longer-term low oil inventories and higher oil prices.
USDCAD in focus
The best pair to trade would be the USDCAD. A low reading on the core CPI metrics and USDCAD upside makes sense as the Fed has openly made a hawkish tilt. However, remember that the USDCAD and oil have a greater than 95% correlation with oil prices. This means that for the USDCAD to be a great pair to trade we would also want to see oil prices moving lower.