Goldman Sachs weighs in on the Canadian dollar (CAD) in the context of its recent monetary policy changes and the broader environment of USD weakening.
Key Points
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BoC Rate Hike: The Bank of Canada (BoC) has implemented another 25bp rate hike, which was in line with market expectations.
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Potential for Further Hikes: There’s an increased likelihood of another rate hike later in the year, possibly as soon as September. This speculation arises from the BoC’s resolute commitment to revert inflation back to the 2% target. The threshold for a pause in rate hikes appears higher now, signaling potential continuity in this tightening trajectory.
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Currency Implications: However, another rate hike might not have the same positive effect on the currency in the short term as before. With the Dollar experiencing a weakening phase due to moderating inflation concerns, CAD might face challenges in other currency pairs.
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CAD vs. USD Dynamics: While a declining Dollar should typically push USD/CAD lower, the Canadian dollar is not Goldman’s first choice for capitalizing on USD’s weakness. This is primarily due to CAD’s high sensitivity (or beta) to USD movements.
Summary
Goldman Sachs acknowledges the recent monetary policy actions by the Bank of Canada and its implications for the Canadian dollar. Even though there’s potential for more rate hikes, given the current backdrop of a weakening Dollar, Goldman doesn’t view CAD as the optimal choice for betting against USD in the near term.
At the moment the market is pricing in just a 20% chance of a hike at the next BOC meeting in September but for the October meeting, the pricing is roughly 50/50.
USD/CAD daily