Bankers predict: How far can the strength of the Canadian dollar go?

Gary Howes, editor of Pound Sterling Live, offered a forecast for the Canadian dollar in the coming week, noting that the post-meeting strength may not last long.

House pointed out that in the coming week, the main focus of the Canadian dollar will be the Bank of Canada's (BoC) decision on Wednesday, and the market is inclined to announce that it will maintain the policy rate at 5.0%.

Houser believes that such an outcome would be consistent with a stable Canadian dollar exchange rate, which means that any foreign exchange trading excitement must come from two reasons: 1) the unexpected decision to raise interest rates; 2) the decision to hold the currency, and there are strong signs that the central bank will act - and there may be another rate hike at the next meeting.

Houser said the market sees only a one-in-five chance of a further rate hike before the end of the year, suggesting there is enough room for a rerating to support the currency.

"Hawkish currency holdings could capitalise the Canadian dollar," said Daragh Maher, head of Americas research at HSBC. Mr. Maher said any rise in the Canadian dollar would most likely be against other G10 currencies, such as the euro and sterling, rather than the dollar.

"Recent comments by Governor Tiff Macklem and Deputy Governor Sharon Kozicki suggest they are willing to raise policy rates, if necessary, until conditions are in place to get inflation all the way back up to 2 percent," analysts said. "The question is whether the Bank of Canada's language makes that look more reasonable." It could be higher than the market is currently pricing in. "

House noted that before the decision, the GBP/CAD exchange rate was trading at 1.6692, as the exchange rate was on track for a sixth consecutive week of gains, although the gains did not look convincing: the six-day run of gains had only just reached the point of reversing the sharp decline from 1.6750 to 1.6562 recorded on October 12 and 13. Meanwhile, the EUR/CAD exchange rate looked firmer, having risen to 1.4546 as the pair continued its recovery momentum in October. It is worth noting that the USD/CAD exchange rate was just above 1.37, and the recovery has clearly lost momentum.

Analysts at CIBC Capital Markets said: "After September's weak consumer price index (CPI) across all indicators, the Bank of Canada is almost entirely certain to hold its ground at this week's meeting (priced at 1 basis point). We continue to expect USD/CAD to rebound to 1.3900 by the end of the year."

Barclays strategists said that at Wednesday's Bank of Canada meeting, "risk-reward favours long Canadian dollar exposure", as the market does not price in the risk of hawks holding or even raising interest rates by 25 basis points.

"CPI may have been slightly softer last week, but it did little to improve the backdrop for core inflation stickiness," Barclays said. This suggests further evidence of the Bank of Canada's "hawkishness" includes that wage growth remains above target and has strengthened recently, and that corporate pricing has not yet normalised, according to the latest Bank of Canada survey.

Barclays strategists are shorting the euro against the Canadian dollar this week, targeting 1.41.

Lower-than-expected Canadian inflation data last week led to a rate hike this week, although "there is still a lot to be said in the McClum/Rogers statement, latest forecast and press conference," said Bipan Rai, head of FX strategy at CIBC Capital.

Weak inflation expectations last week led to a broad-based weakening of the Canadian dollar, strengthening market expectations for interest rates to remain unchanged.

Canada's CPI rose 3.8 per cent year-on-year in September, a significant decrease from August's 4.0 per cent and below expectations of 4.0 per cent, Statistics Canada said. The month-on-month change was -0.1 per cent, below expectations of 0.1 per cent and 0.4 per cent in August. Meanwhile, August's core CPI fell 0.1 per cent month-on-month (2.8 per cent year-on-year), while the adjusted CPI measure fell 3.7 per cent year-on-year, below market expectations of 3.8 per cent and 3.9 per cent previously. But any Canadian dollar strength following the Bank of Canada's decision is likely to be limited in scope and duration. Bilal Hafeez, head of research at Macro Hive, said the recent drop in oil prices was an important consideration when looking at the Canadian dollar's October pullback against most other currencies. He said a string of poor performances for the Canadian dollar has prompted hedge funds to reallocate to more bearish positions, noting that the market sector has positioned squaring C $31,200 long positions and opened an additional C $10,400 short position in the past month. "No other currency has seen a bigger bearish correction during this period, making the Canadian dollar the most net short currency outside of the yen," said Mr. Hafeez. " While oil prices could give the Canadian dollar some upside in the near term, demand could fall in the first half of 2024 as production increases further. That means the commodities picture is weaker than it looks, "he added.