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Canadian Dollar May Lose Ground Even as the BOC Delivers

The Canadian Dollar has fared considerably better than other commodity-linked currencies so far this year, despite a sour market mood. The so-called Loonie is tracking second only to its US counterpart among the G10 FX currencies, pulling ahead of the similarly sentiment-geared Australian and New Zealand Dollars.

Elevated crude oil prices might be a tempting explanation for this outperformance. Russia’s invasion of Ukraine disrupted critical supply routes and sent energy costs higher, driving windfall capital into the hands of top exporters, including in Canada. The similarly oil-linked Norwegian Krone lagged vastly behind, however.

CAD up against AUD, NZD and NOK year-to-date (weekly chart)

Canadian Dollar May Lose Ground Even as the BOC Delivers

Chart crated with TradingView

CAD resilience would nevertheless be tested amid an upswell of worries about on-coming recession in recent weeks. Economists marked down global GDP forecasts for 2023, several large companies like Target and Walmart issued spooky guidance, and traders marked down central bankers’ appetite for rate hikes.

The rate hike path priced out for the Bank of Canada (BOC) was no different, edging lower in tandem with the local unit. The currency has shed 1.3 percent against an average of its major counterparts over the past two weeks. How this part of the story develops seems central to how price action will evolve from here.

CAD down for two weeks against top currency counterparts (weekly chart)

Canadian Dollar May Lose Ground Even as the BOC Delivers

Chart crated with TradingView

GDP data is first in the spotlight. It is expected to show that output grew at an annualized pace of 5.2 percent in the first three months of the year, down from 6.7 percent in the fourth quarter. A policy announcement from the BOC is likely to be the main event however, and any substantive moves will probably wait for it.

The central bank is expected to deliver at least a 50 basis point (bps) rate hike. What’s more, the markets price in a nearly even probability of a larger 75bps rise. With such heady outcomes already factored in, engineering a hawkish surprise might be somewhat difficult.

With that in mind, even delivering at baseline may register as something of a disappointment against the backdrop of broad-based growth concerns. Absent a fresh injection of unmistakably hawkish rhetoric, the priced-in rate hike path may soften a bit more at the longer end, pressuring the Canadian Dollar downward.

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