CAD: Will need an ultra-hawkish BoC message to drive the loonie higher

"The Bank of Canada meeting (Wed) will be the highlight of the week; the central bank is likely to continue its gradual tightening path and provide a 25 basis point rate hike," point out ING analysts.

Key quotes

"This should be no surprise, as headline inflation has been out of the BoC’s comfort zone for some time now, hitting what it sees as its upper threshold of 3% YoY in July. And with all three of the main core measures floating around the 2% target, there is little reason for the BoC to hold off on pushing policy rates higher. Market expectations have marginally cooled over recent weeks (now only 78% priced in versus 95% at the start of the month). A follow-through of a hike should give CAD a knee-jerk boost; however, with a 100bp of tightening already priced in over a 2-year horizon, we think there's limited scope for a sustained rally in CAD - unless the BoC send an ultra-hawkish signal."

"We see this as highly unlikely - with the fragile global market environment, uncertainty over global trade and mixed Canadian data of late (in particular weak wage growth) likely to see a more 'dovish hike' from the BoC. We, therefore, wouldn't be surprised to see USD/CAD snapback higher following an initial post-meeting fall. Our short-term view remains that we see USD/CAD stabilising in the 1.28-1.30 range – with no directional conviction."

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