This week we will have another two rates decisions; RBA already kept their the same this morning. For now, I want to concentrate on the BoC due to oil.
Here is what I see:
So they added 25 basis points in July on the numbers that were given to them; 1,3% CPI June and 1% CPI July; thus the big surprise. I didn’t expect it at all and the reaction proved that very few people expected the rate hike. The Canadian dollar appreciated more than 2 cents on that day against the greenback and continued it’s strength another 3,5 cents over the following 2 weeks.
So we all know oil is a good leading indicator for inflation and if you want proof, look no further. Here is the chart Canadian inflation compared to oil.
Here are my thoughts; If they are willing to increase rates at 1%, CPI why not 1,2%? Are they forecasting the price of oil perhaps? I should think that these guys know better what the prices of oil will do, they are exporting it! And the storm in Texas is not a factor?
In my opinion, here is the chain reaction of events most likely to happen : Hurricane Harvey can result in shortage of oil supply in the US. Lower supply in the US will results in higher production by Canada which means CAD strength, economic growth, more employment resulting in higher inflation. The higher prices anticipated in oil will also result in higher inflation which will lead to interest rates hikes. It is a double whammy; The Canadian Dollar will appreciate due to higher exports and inflation causing higher rates. The flip side is if they don’t hike rates now; as everyone is expecting and just a small movement will be seen now, but medium term CAD will appreciate with oil.
I think the rate hike is more likely than not. I believe the numbers tell us that they will increase rates and we can now prepare for it according to the fundamental analyses and take positions which make sense.
So here is a strategy you might use: Looking to short UsdCad with small rallies, which technically are corrections due to the massive bearish market on the chart, just in case we get that rate hike. In case no rates hike, the Canadian Dollar is likely to strengthen medium term in any case due to the supply shortages coming from Texas.
Pick your positions with care!