The Canadian dollar has lagged its G10 peers, but support is coming from firmer Bank of Canada tightening expectations and elevated oil prices. BoC communication has increased the perceived risk of a near-term hike, with an initial move expected before year-end. Markets are assigning an 85% probability to a rate rise this week, and a total of four hikes are priced in through September 2027, though subdued core inflation is presented as a constraint on the timing of any move.
Rate Path and Market Positioning
The rate path is framed as broadly CAD-supportive, particularly against a backdrop in which less tightening is expected from the Fed and ECB by end-2027 than markets currently price. However, with a large portion of BoC tightening already reflected, further currency gains would increasingly rely on the BoC turning more restrictive than expected.
Economic Data and Risks
Mixed signals from the real economy complicate the outlook: stronger labour and activity data could reinforce the case for additional hikes, while a sharper slowdown would curb scope and encourage caution due to policy lags. A trade conflict is described as a key risk, as uncertainty could weigh on growth and limit CAD appreciation.
