(Bloomberg) — The loonie is likely to extend its recent recovery if the Bank of Canada’s policy decision Wednesday proves hawkish.
The Canadian dollar rose 0.3% to C$1.3404 on Tuesday ahead of a policy makers meeting in Ottawa the next day. The currency, on track to reach its strongest level since May 10, was the second-best performer among its peers in the Group of 10. The Australian dollar gained the most on Tuesday after the Reserve Bank of Australia surprised by raising rates.
“Focus on Wednesday’s BOC policy decision is intensifying after the ‘surprise’ RBA hike earlier,” said Shaun Osborne, the chief FX strategist at Scotiabank in Toronto. A rate increase on Wednesday “should give the CAD a modest lift, at the very least, the more so if the BOC does not shut the door on more tightening,” he said.
The economy is expanding at an accelerated pace despite higher borrowing costs, increasing market bets and economists’ forecasts for the Bank of Canada to resume rate increases after it kept the key rate on hold since January, when it boosted the lending rate to 4.5%.
Stronger growth and a tight labor market has increased chances for another hike in Canada this year, but it is more likely to happen in July, Goldman Sachs strategists, including Kamakshya Trivedi, wrote in a note. Policy makers are more likely to make a rate move at the meeting when they also update forecasts, which is due in July, according to Goldman.
The loonie has gained more than 1% against the dollar this year. Speculators curtailed bearish bets on the Canadian dollar by almost half in the week through May 30. Since then, futures open interest has fallen to a one-week low, an indication that bearish bets have been further trimmed.
“We do think that the CAD could be an outperformer on the crosses if the Bank of Canada likes to hike,” Bipan Rai, CIBC’s global head of FX strategy, said. “We also think that the Canadian dollar is undervalued.”
–With assistance from Robert Fullem.
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