On Friday, USD/CAD slipped in line with the broad weakness of the US Dollar, closing the week below 1.3280 after rallying to over 1.3385 earlier in the day. However, this morning, the US dollar is recovering most of its losses due to negative economic news from China, which once again highlights the potential for weaker global demand. A decline in global demand would undoubtedly have a negative impact on Canada’s export-dependent economy.

All eyes are currently on the Bank of Canada’s upcoming policy announcement on Wednesday morning. Until then, it is anticipated that the Canadian Dollar will move in line with prevailing market sentiment.

While there are valid arguments for both maintaining the current Rate and implementing a 25 basis point rate hike, analysts slightly lean towards a hike that would raise the policy rate to 5% for the first time in over 20 years. The justifications for this additional rate hike are diverse, but experts generally agree that inflation has proven more persistent than initially anticipated. Consequently, the Bank of Canada is inclined to err on the side of overshooting rather than undershooting, particularly if they are committed to achieving their stated inflation target of 2%.

An intriguing analysis from the Bank of Montreal suggests that the market has not fully priced in the possibility of a rate hike by the Bank of Canada. If the hike occurs as expected, the Canadian dollar could experience a larger-than-expected surge in response to the rate increase. This could be a potential opportunity for US dollar buyers who have been waiting.

The Canadian dollar is currently trading at 1.3282 against the US dollar.