Hawkish BoC and Strong Jobs Data Should Keep the Loonie on the Front Foot

CAD Key Points:

Outlook: Bullish

• Canadian Job Numbers Smash Estimates, Actual 108.3k Vs 10k Forecast.
• Rising Oil Prices and Farm Exports Boost Trade Surplus.
• BoC Governor Macklem Issues Stagflation Warning and Insists More Rate Hikes are Needed.

CAD Week in Review

The Canadian Dollar rallied on Friday as strong data and rising oil prices boosted the Loonie. Canadian unemployment beat estimates coming in at 5.2% with estimates at 5.3%, while the employment change numbers came in at 108.3k against estimates of 10k. USD/CAD declined 200-odd pips, wiping out four days of gains by the greenback. US job numbers came in strong following a hawkish Fed on Wednesday but could not arrest the decline in the pair.

Money markets now price in a 62% chance the Bank of Canada will hike by 50 basis point in December, up from about 50% before Friday’s jobs and unemployment data.

Rising Oil Prices and Farm Exports Boost Trade Surplus

Canada saw a surprising increase in exports for the month of September which boosted its trade surplus thanks in part to rising oil prices. Despite growing economic headwinds globally, demand for Canadian products remain strong as wheat exports continue to benefit from the Russia-Ukraine conflict. As the Canadian economy is expected to slow in Q4 based on estimates from the BoC, rising exports could help offset the slowdown locally.

Oil prices meanwhile continued to rally higher this past week with WTI breaking back above $90 a barrel. The question here is whether we can remain above the $90 handle and move higher as a stronger oil price should help boost the CAD moving forward.

Bank of Canada Governor Tiff Macklem Speaks Before Senate Committee

The Bank of Canada is walking a fine line in the words of Governor Macklem as he answered questions before a Senate committee. As recession risks grow and inflation remains stubborn, Governor Macklem warned that further rate hikes are needed. The Governor went on to say that October’s 50bp hike came as a result of a slowdown in the economy while warning that a repeat of the 1970s stagflation scenario remains a possibility. He reiterated that the BoC will do what is neccesary to avoid such a scenario which could include another “bigger than normal step”. It remains clear given the Governors comments that despite the 50bp hike the BoC is not done with its interest rate hiking cycle which should bode well for the CAD, in particular against the greenback.

CAD Economic Calendar for the Week Ahead

A quiet week ahead for the Canadian dollar in terms of data with the only notable event a speech by BoC Governor Macklem.

For all market-moving economic releases and events, see the DailyFX Calendar

USD/CAD D Chart, November 4, 2022

Source: TradingView, Prepared by Zain Vawda

Outlook and Final Thoughts

The CAD posted significant gains against the greenback to close out the week. The weekly timeframe looks likely to print a shooting star candle close which would hint at further downside for USD/CAD in the week ahead. The daily timeframe meanwhile has formed a head and shoulders pattern with a daily candle close below the 1.35 region opening further downside potential.

Both fundamentals and technicals hint at continued CAD strength for the week ahead. Governor Macklem is expected to keep up the hawkish rhetoric when he speaks on November 10. We do have US inflation due out the same day which could halt CAD gains against the dollar should the print come in hotter than expected.

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— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda