USD/CAD: Loonie has limited appreciation potential – Commerzbank

The market is increasingly banking on the Bank of Canada (BoC) hiking its key rate by 50bp at the next meeting. The rate hike expectations are likely to have been fuelled by Monday’s publication of the BoC’s Business Outlook Survey. Although the loonie is set to get some support in the near-term, there is little room to see additional gains, economists at Commerzbank report.

Fuelling rate hike expectations on the market

“The BOS indicator signalled a further rise in capacity restrictions and continued supply chain issues, rising wage and price pressure and a rise in inflation expectations, in particular in the short term. Also, as a result of the war in Ukraine, businesses are expecting significant price rises so the majority now expect that it will take longer, that is closer to three years, until inflation returns to the 2% target.”

“Additional defence spending as a result of the Ukraine war, higher spending on climate action and the creation of affordable housing are only some of the challenges faced. With a view to the already challenging economic situation an expansionary fiscal policy would further intensify inflation pressures.”

“A high-spending budget with rising deficits might further fuel rate hike expectations, thus providing at least temporary support to the loonie.”

“From our point of view, further CAD appreciation potential is limited though as a lot seems to have been priced in already.”