Canadian Dollar rate – The Canadian dollar sank against its U.S. counterpart on Monday, reversing a modest early session uptick as cautious investors unwound positions ahead of a crucial Bank of Canada meeting midweek that may see rates rise yet again to tame multi-decade high inflation.
Already battered by 10 consecutive interest rate hikes over the past year as central bankers rush to cool overheating prices, market analysts fear the economy may not withstand another outsized increase without sparking recessionary forces.
But with inflation still hovering stubbornly at 6.9% in December, nearly four times the BoC’s 2% target, a majority of economists in a new Bloomberg survey predict Governor Macklem will announce a 25-basis point hike on January 25th.
That would push the benchmark overnight lending rate from 4.25% currently to 4.5% – the highest level witnessed since 2008. Whether that pains an already slowing economy further remains key point of contention.
Canadian Dollar rate———-
Loonie Closes 1.1% Lower
Canadian Dollar rate – After trading within a narrow 78.80-79.10 cents band through early North American deals, the Canadian currency met fast selling Monday afternoon.
It slid over a cent lower from session highs struck following better-than-anticipated wholesale trade data as traders latched their gaze firmly on Wednesday’s rate verdict.
The downturn saw the loonie close January 23rd dealings at 79.24 U.S. cents, down 1.1% from Friday’s settle. Against top peers, the Canadian dollar fared worse over European currencies like the pound which faced relatively more muted losses around 0.6%.
Immediately analysts tied CAD weakness to the dampened risk appetite with equities also sliding as participants reduced exposure at elevated levels ahead of central bank event risks.
Where the loonie trends in coming weeks depends almost entirely on whether Governor Macklem signals any pause in the year-long tightening offensive as economic prospects show early recessionary traits some argue.
GDP Shrinks for First Time Since PandemicOn Friday itself, Statistics Canada revealed the economy unexpectedly contracted 0.1% in November – marking the first monthly GDP decline since the initial COVID lockdown plunge.
Canadian Dollar rate – The drop also means fourth quarter 2022 growth is tracking below 1% as per Toronto Dominion Bank estimates – falling neatly into technical recession zone after the previous quarter also posted negative print.
With forward looking indicators like the IVEY Purchasing Managers Index already in contraction for past two months plus home sales collapsing at rates not seen since 1982 recession – data shows shrinking activity from key engines.
Housing Bear Market UnderwayCanadian existing home prices have tumbled 11% since February peak as the real estate sector battles inventory glut from listings plus cratering demand in the face of rising ownership costs and declining affordability.
Canadian Dollar rate – Average selling prices that surpassed C$900,000 last year now hover near C$640,000 – more in line with 2016 values suggesting nearly 7 years worth appreciation wiped out across Southern Ontario’s residential market within 12 brutal months of correction!
The once red hot housing sector directly and indirectly accounts for 30% of Canada’s GDP based on various measures. Its bearish reversal over the past quarters is undoubtedly the prime culprit dragging Canadian economy near technical recession thresholds despite labor market resilience so far.
But that may change as well if the steep housing slowdown spills over to curb job openings and trigger layoffs in related construction, banking and services industries as feared. Already December employment saw first net losses in over a year at nearly 23,000 roles shed mostly across goods producing sectors.
With key pillars like housing and manufacturing crumbling – analysts argue Governor Macklem must relent on aggressive rate hikes that helped trigger market instability and threatens consumer sentiment hitting multi-year lows.
Can BoC Risk Another Outsized Hike?Critics claim another 50 basis point rise akin to September and October moves risks cementing recession outcomes by further undermining sensitive household and business confidence.
Canadian Dollar rate – Instead, Governor Macklem could settle for more modest 25 basis point tweaks across two or three consecutive meetings. That allows smoking out remaining inflation pressures across the system without immediately tanking still positive growth currents.
The case for a smaller hike also draws credibility from latest inflation metrics showing prices cooling faster than predicted since October peak 7.3% levels. Buoyant winter holiday spending numbers further confirm Canadian households continue displaying resilience to cost-of-living crisis despite rate jumps and inflationary strains.
With suitable pace of moderation, BoC may achieve its elusive soft landing – bringing inflation to target levels without excessively jeopardizing broader economy. But they have probably only one or maximum two meetings worth wiggle room left before consumer fatigue sets in according to analysts.
Hence, this Wednesday’s guidance and outlook commentary will be watched closely for clues whether Canadian central bank turns less hawkish if the inflation fight shows signs of progress as data indicates lately.
Loonie Remains Data Dependent
Markets expect 4.5% rates post-January meeting but remain divided if March itself halts the year-long hiking regime or continues into mid-2023 with risks almost equally weighted for both outcomes.
That is why the loonie saw volatility pick up Monday as investors turned nervous holding Canadian dollar positions without clear guidance from Governor Macklem forthcoming. FX traders affix nearly 60% probability for a 25 basis point move this week after deliberating the various arguments.
But even a modest hike that aligns market expectations may spark loonie uplift if BoC sounds less aggressive tackling inflation going forth. Equally, back-to-back 50 basis point shifts signaled could roil markets risking heavy CAD selloff as recession forecasts heighten. The reaction thus remains binary based on whichever guidance Macklem offers once rates are announced.
For jittery FX participants, next couple days promise outsized action once the rate and policy outlook sees clarity. That may spark extended CAD downside or sharp reversals higher depending entirely on the tone BoC Governor strikes parsing inflation’s trajectory – for now traders prefer safer dollar haven awaiting the looming risk event.
