Bank of Canada First to Tighten Up

Bringing Forward Rate Hike Horizon

The Bank of Canada on Wednesday said it now expected to begin raising interest rates in 2022, earlier than it had previously been forecasting. This makes Canada the first major developed economy to be seriously talking about raising rates soon. Although Canada’s base rate is relatively low in absolute terms at 0.25%, this is in fact at the higher boundary of the going rates for G7 economies. Based on the current rate of 0.25%, many analysts are seeing Canada reaching a base rate as high as 1% by 2024.

Elevated Canadian Growth Forecast

The Bank made a massive adjustment in its 2021 forecast for GDP, moving it up by 2.5% for 2021 from 4.0% to 6.5%. It also released forecasts for global growth and growth of major Canadian trading partners, making significant upward revisions to all. If correct, this suggests that other important central banks may begin to look at the resurgent specter of inflation and reflated asset bubbles which have recovered to pre-corona levels and decide that the economy can survive a minor rate hike or two.

What Does this Mean for the Loonie?

It looks as if Canadian dollar bulls have got both economic fundamental and the central bank providing welcome tailwind. Real estate and stock markets in Canada are going up and the economy is starting to boom. Maybe more importantly, the Bank in its statements gave no hint that it would intervene in any way to try to prevent the near-term appreciation of the Canadian dollar.

Looking at the weekly price chart of the USD/CAD currency pair over the past year or so, I think that the Loonie is in a firm long-term bullish trend, primarily against the U.S. dollar.

USD/CAD Weekly Price Chart 2020-2021

The technical evidence has been the relative smoothness of the price movement shown in the chart, which could be contained on the lower side by a symmetrical trendline which would form a perfect channel, although I have not drawn this in the price chart.

It is worth noting that there are slightly stronger major currencies than the Canadian dollar, but none that have trended up for so long so persistently.

What Does this Mean for Me?

Longer-term Forex traders, such as position traders, should consider being at least partially long of the Canadian dollar. Shorter-term traders might look for good selling opportunities in USD/CAD on intraday or intraweek rallies.