USD/CAD : Start of Bank of Canada Rate Hike Cycle?

From Greg Gibbs of RBS

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Canada will be in focus early this week. GDP data is released today, and the BoC are poised to hike rates from their emergency setting of 0.25% on Tuesday. The odds of a hike have returned to be largely priced in, and predicted by virtually all analysts.

The domestic economic data are screaming out for a hike with a strong housing market (prices up 11.1%y/y in March), surging retail sales (9.1%y/y in March), inflation pressing up to the target and preferred ceiling for inflation at (1.9%y/y core in April), the biggest jump in employment last month on record and unemployment trending down since August last year.  The only question really should be why have they not already hiked and perhaps they should go by 50bp. Although everyone sees only a 25bp hike.

The return of some stress in global banking markets and fears of a slowdown in Europe had dampened expectations for a hike, but recent calming and aggressive action in the region to address its problems suggests that the Bank of Canada needs to be bold. The statement should be upbeat and provide for further strength in the CAD, at least against other commodity currencies.

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See also my Chart of the Week. Am expecting the short USD/CAD trade to perform within a relatively short period of time (chart timeframe is daily, not my usual weekly). Depending on where one marks the SHS neckline, objective is anywhere between 1.0390 and 1.0330. Getting there, however, will put a decidedly bearish tilt on the weekly and monthly charts.

[Canada labor market chart above "borrowed" from ING Research].