This week the BoC meets so it is a good time to see what’s been driving the CAD. Take a look at the CAD index and you can see that since the start of the year CAD has been steadily gaining.
Those gains have been mainly due to higher oil prices and aggressive interest rate hikes from the BoC.
Higher oil prices support the CAD
If you look at the same chart below, but with oil prices included in the green, then you can see that oil prices heavily influence the CAD. Rising oil supports the CAD and falling oil weakens the CAD.
In July the Bank of Canada front-loaded interest rates by 100bps in a surprise move. At the time we recognised that a lot of the expectations for higher interest rates have already been priced in and we were not expecting much further upside in CAD. This turned out to be the case with CAD coming off its highs and drifting lower despite the 100bps hike.
What’s the opportunity for the BoC this week
The best opportunity for the BoC this week will be if the Bank starts to raise concerns about the medium-term growth outlook. Any expectations that growth is slowing in the US (Canada’s major trade partner) should weigh on the outlook for CAD. Any hint that the path of rates will have to slow whorl also weigh on the CAD. With so much aggressive policy tightening priced in the strongest reaction here is likely to come from a dovish response. A good currency pair to consider shorting on a dovish reaction could be the CADCHF pair.