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    Citi Bank Goes Against the Grain; Predicts Bank of Canada Rate Hike on Wednesday

    Updated: May 28, 2018  

    As reported on Friday, the Canadian dollar ended last week with its largest one-day drop against the US dollar since January following disappointing economic data. The data signalled to markets that the Bank of Canada would hold steady on interest rates – currently at 1.0% – at its meeting on Wednesday, and the probability implied from derivatives markets of a quarter-point hike by the bank fell to just 19%.

    Much of the decline in expectations for Wednesday’s BoC meeting is due to a single remark from BoC Governor Stephen Poloz on October 14th. The bank is in “intense data-dependent mode,” said the Governor.

    With that in mind, Friday’s data seemingly illuminated the path for rates – for this month at least – but clearly Citi Bank didn’t get the memo.

    In its weekly outlook, released on Monday, the Hong Kong Wealth Management Division of Citi placed itself among that very small minority predicting a hike on Wednesday when it wrote: “We expect the BoC to hike the interest rate by 25bps to 1.25% at Oct 25 meeting and three more hikes to 2% may be seen next year.”

    USD/CAD 3 Month Chart

    Naturally, a rate hike would be strongly supportive of the Canadian dollar, as would a 2% overnight rate in 2018. This is reflected in Citi’s USD/CAD forecast, which puts the pair at 1.20 in 6-12 months. Exchange rates at 1.20 or below haven’t been seen since May 2015 and would mark appreciation in the Canadian dollar of more than 5% from Tuesday’s rate of 1.2645.

    Risks to the Canadian dollar include a failure of the US, Canada and Mexico to renegotiate NAFTA and a subsequent cancellation of the agreement – the probability of which is roughly 30% according to Citi – and further tightening of monetary conditions in China, which typically leads to a decline in commodity prices.


    New Zealand Dollar: “Downside Risks May Recede”

    Approaching Tuesday’s European session, the New Zealand dollar remains heavy, buying only 0.694 USD. A breach of Monday’s low of 0.6931 would take the currency to its lowest level against USD since May.

    Against the Canadian dollar, the “kiwi” fell last week to its lowest level in nearly 17 months, buying only 0.8712 CAD, but is slightly higher on Tuesday, in the mid-0.87s.

    NZD/USD 3 Month Chart

    Citi Bank stated the obvious on Monday when it wrote that “NZD underperformance of late has been primarily due to the election and associated uncertainties.” The currency lost 2.5% of its value between September 25th and October 18th following an inconclusive election in which the incumbent National Party failed to secure a majority, and then lost a further 3% since Thursday’s announcement that it would not be the Nationals in power, but in fact the Jacinda Ardern-led Labour Party, supported by the controversial policies of New Zealand First.

    The good news for owners of New Zealand dollars is that much of the political uncertainty or undesirability has now been factored in to exchange rates according to Citi, and “as uncertainties fade, NZD downside risk may recede…which may support NZD.”

    Citi’s NZD/USD forecast of 0.71 over 6-12 months marks strength of 2.3% on Tuesday’s rate. Further to political clarity, the kiwi will be supported by a third quarter 2018 interest rate hike by the Reserve Bank of New Zealand, which itself will be induced by an improved inflation outlook and strength in New Zealand’s economy.

    Posted under: #News #CAD #NZD #USD

    Disclaimer: Please note any provider recommendations, currency forecasts or any opinions of our authors should not be taken as a reference to buy or sell any financial product.