Published: November 6th, 2024
Despite the Bank of Canada’s recent decision to step up the pace of interest rate cuts, analysts at ING say forex traders should look to CAD as they build hedging strategies for a Trump re-election.
In a note to investors, analysts the Dutch bank’s FX strategy unit wrote that they were surprised by the ‘dovish’ move by the BoC, but said markets had already priced-in a 50bp cut.
'Sentiment around CAD has been tilting to the dovish side for the past few weeks, so the Loonie was only impacted slightly by the decision.’
The Loonie firmed up in the second half of October alongside an uptick in betting market odds for a successful Trump White House bid. Website like Polymarket have become a kind of surrogate for financial market sentiment, and the Canadian Dollar’s outperformance closely follows the recent upward path taken by the Greenback.
‘Soft Canadian data could deflate the Loonie in November, but in the near term we still think CAD can demonstrate resilience at the crosses. When hedging against Trump-related risks, it has a relative safe-haven status compared to other high-beta currencies.’
CAD barely moved following the BoC's 50bp cut on October 23, and ignored bank signals that more cuts are in the pipeline. The decision to make a substantial 50bp cut came after Ottawa policymakers decided inflation risks had subsided, and growth needed support.
In a statement the bank said it acted more robustly since Canada had returned to a low-inflation environment, where the risk of ‘undershooting’ inflation is as much a concern as over-reacting.
‘A notable rate cut was an easy call for anyone paying attention to recent language from the Bank of Canada,’ said ING analysts. 'We expect more to come if events unfold as expected’.
In March 2024, one of Canada's largest banks predicted a bout of Canadian Dollar weakness in the first half of the year as the Ottawa central bankers faced up to the negative impact of restrictive interest rate policy.
An analysis by National Bank of Canada (NBC) described recent positive performance by the Loonie as ‘lukewarm’, especially when contrasted with other commodity currencies like the New Zealand and Australian Dollars.
NBC analysts called CAD ‘the weakest amongst the strong’, blaming low performance against other commodity currencies on underwhelming economic figures.
In a note to investors the bank parsed recent Canadian economic data and pulled out areas of weakness undermining Q4 GDP growth statistics, among them confirmation that Canadian domestic demand had fallen for the first time in 12 months.
Analysts said the tepid fundamentals of the Canada’s economy could be blamed on Bank of Canada (BoC) interest rate policy, which at five per cent is draining vitality and hindering growth.
‘The downside of the BoC’s restrictive monetary policy is easier to see when you look at private domestic demand, which shrank for two consecutive quarters and has now dipped four times in six quarters.’
‘The bank has lost the justification for maintaining such a restrictive monetary approach.’
NBC also believed that Canada's most recent labor market print was overly optimistic, as the headline 41K expansion seen in February had been inflated by public sector job postings. The bank noted that private-sector employment had also sat unchanged since June of 2023.
According to NBC, all of this indicated that the Bank of Canada would be compelled to cut interest rates. On a year-to-year comparison, inflation had already fallen back to Ottawa’s 1-3 per cent target range, at the time sitting at 2.9 per cent.
In April of 2023, the Loonie received a shot in the arm as oil prices rose by more than 8 per cent in the wake of a surprise production cut pledge by the OPEC+ group.
Markets were blindsided by an announcement from the crude cartel that saw members agree to slash nearly 1.7 million barrels of oil per day from May 2023 through to December. The Saudis agreed to the most extensive cuts, scaling back production by 500,000 barrels per day.
An analysis by Bloomberg said the move would give support to petro-currencies like CAD. While the cuts would tighten crude supply, the world economy would see a fresh inflationary jolt as a side effect.
Central banks were expected to act, meaning more rate increases than markets had priced-in before the OPEC+ bombshell. At the time (early April), USD/CAD was close to dipping below a bullish trend line after reaching some key support levels.
Alongside the Saudis, Russia extended a previously announced cut of 500,000 barrels per day through to year-end. Several other Gulf states also joined the group policy and announced their own cuts.
A production cut of nearly 1.7 million barrels of oil per day was significant, Bloomberg said, and would meet the cartel’s aim of keeping crude prices supported.
The USD/CAD rate was also impacted by improving risk appetite across financial markets. The US Federal Reserve had been signaling that rate increases might be paused, putting the Greenback on the back foot.
The core PCE Price Index, which is the Fed’s benchmark inflation gauge, came in weaker than expected on Friday 31st March. The OPEC+ announcement followed the next day and will likely compel Fed policymakers to re-think rate decisions.
In December 2022, analysts were saying the return of declining crude oil prices would pull the Canadian Dollar down.
Analysts at Bank of Montreal (BMO) said a (then) recent dip in oil prices looked like a long-term trend and would contribute to Loonie declines over the long term.
‘The unexpected decline in oil prices over has trickled through to forex markets in the ways we would expect,’ wrote BMO in a currency briefing. For the Canadian Dollar, that’s manifesting as underperformance linked to oil market dynamics.’
