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The Bank of Canada looks set to hike and that could send the loonie significantly higher

Photo by Donald Weber/Getty Images

The Bank of Canada (BoC) will meet this time next week, and, if the markets are correct, it looks likely to do something that it hasn’t done since 2010: raise interest rates.

Times are a changing.

Following in the footsteps of the US Fed, it looks set to begin normalising monetary policy, reversing a series of cuts delivered in 2015.

While that outcome is now widely expected by markets, pricing in the probability of a 25 basis point hike on July 12 at around 90%, what traders really want to know is what ramifications it will have for the Canadian dollar (CAD), also known as the loonie.

To Elias Haddad, senior currency strategist at the Commonwealth Bank, it’s likely to strengthen no matter what the BoC delivers, upping his forecasts for the CAD against both the US and Australian dollars over the next 18 months.

Here’s the Commonwealth Bank’s latest CAD forecasts, along with where they sat previously.

Source: CBA

Although Haddad admits that the CAD could come under pressure regardless of what decision the BoC makes next week, he says that any initial weakness offers investors an attractive opportunity to buy the dip looking for a move higher over medium-to-longer term.

“If the BoC lifts its policy interest rate by 25bps (basis points) to 0.75% on 12 July, the likelihood is the BoC will emphasise that it will not be the start of a series of rate hikes but rather a removal of the 50bps insurance rate cuts implemented in 2015,” he says, noting that in the short-term this may “curtail significant rallies in CAD”.

Akin to a “sell the fact” response, essentially, given that outcome is already largely factored in by markets.

However, as the bank’s new forecasts show, they don’t expect the CAD to be capped for long.

And, if the BoC decides to surprise the markets and not cut rates, Haddad says this will offer an even better opportunity for investors given the CAD will likely fall by as much as 2% in his opinion.

“This would be a good opportunity to accumulate CAD on weakness,” he says.

“We believe the coming BoC interest rate hiking cycle will lead to a period of Canadian dollar outperformance against both USD and AUD.”

Here’s the USD/CAD weekly chart.

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