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The market has priced 84% odds of a Bank of Canada hike next Wednesday, which caps how much further the Canadian dollar can climb on it.
The Canadian dollar has run too far on a Bank of Canada rate hike that is now almost fully priced, leaving the currency with little left to gain when the decision lands next Wednesday.
"As this hike goes from not really priced to almost fully priced (and the date nears), the risk/reward in USDCAD gets substantially worse," says Brent Donnelly of Spectra Markets.
The call draws questions as to whether the currency faces a fresh setback.
Market-implied odds of a 25 basis point move on 28 October reached 83.9% on Monday, having sat below 50% a week earlier.
Donnelly is short USD/CAD from 1.4238 and intends to close the position between 1.4011 and 1.4021, taking the profit rather than holding into a decision the market has already paid for.
"I will be looking to take profit near 1.4000 because I don't think it's quite the layup the market is making it out to be," he says.
USD/CAD trades at 1.4063 on Wednesday, half a cent above that exit zone and more than two cents below last week's 1.43 high.
The Pound to Canadian Dollar exchange rate sits at 1.8809, having recovered everything it lost on Monday's Alberta referendum result.
The two move together, because a Canadian dollar that stops appreciating against the US dollar stops appreciating against the pound, and a USD/CAD bounce off 1.40 would, all else equal, carry pound-Canadian dollar higher with it.
The chart gives that pull a floor to work from, with the 21-day moving average at 1.88074 and the 100-day at 1.87997 now converged directly beneath the 1.88100 horizontal line that capped the pair through August and September. Buyers have defended that confluence on every dip this month, and short covering in USD/CAD of the kind Donnelly describes would reinforce it.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
Talk to a specialistGovernor Macklem Has a Lot to Say
Macklem's weekend remarks did the repricing, with the inflation report pointing the other way.
"The move in Canadian rates has been fast and furious and another bearish data point for CAD (slightly weaker CPI) has been rejected," says Donnelly.
"Macklem's weekend statements seem to be paving the way for a rate hike at the end of October, but it's worth keeping in mind that he doesn't mind a little surprise here and there," he adds.
Two of 23 economists surveyed were calling for a hike before the weekend, and BMO, National Bank and Laurentian all moved to one on Monday.
"Bank strategists are sometimes forced into nowcasting instead of forecasting when central bankers signal something and the risk of looking stupid becomes too big to ignore," says Donnelly.
Headline Inflation Above Forecast, Core Below
Statistics Canada put September inflation at 3.1% year-on-year while the average of the Bank's trim and median core measures landed at 1.85%, overshooting the July Monetary Policy Report forecast on the headline and undershooting it on core.
Canada has seen that divergence three times before, in 2011, 2018 and 2020, and on each occasion headline inflation fell back towards core, which argues against chasing the Bank's hawkish turn.
"I suspect this time could be different," says Donnelly, who gives the Bank room to keep going even as he banks his own position.
What It Means for GBP/CAD
Sterling has a rate story of its own working for it, with UK unemployment dropping to 4.7% in August and private sector pay growth picking up to 3.0%, hardening the case for a Bank of England hike on 5 November.
A hike delivered next Wednesday without guidance for another leaves the Canadian dollar with nothing left to collect, which would lift USD/CAD off 1.40 and take GBP/CAD through 1.88100 towards October's 1.8926 high.
Sellers need the Bank to hike and point to more, driving USD/CAD under Donnelly's exit zone and breaking the moving average confluence, which puts the graphical support at 1.87114 we flagged in Monday's week ahead forecast back in play.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
Talk to a specialist
