EUR/CAD: Loonie rallies after hot inflation report make next BOC meeting a coin flip

• BOC’s three-month moving average surged by a full point to 4.5%
• Odd’s for the October 25th BOC policy meeting jumped to 50.5% vs 25.1% yesterday
• The December 6th implied rate for Canada is at 5.233% (nearly fully prices in a quarter point rate rise)

The Canadian dollar currency is surging against the euro after a hot inflation report raised concerns that the Bank of Canada (BOC) might not be done raising rates.  Inflation was clearly boosted by the surge with gasoline prices, and that will get passed to transportation, delivery, and input costs.  Inflation is going to end up being sticky and until we see a stronger deterioration in the data, the market is going to lean towards more rate hikes from the BOC.  Yesterday, swaps were indicating that the chances of another rate hike were 50/50, now another quarter-rate hike is about to get priced in before year-end.

If oil prices remain elevated that will be problematic for the Canadian economy, but it could be disastrous for Europe.  If the price oil keeps going up, the Canadian economy might be best positioned against most of the other advanced economies.

EUR/CAD daily chart

EUR/CAD (daily chart) as of Tuesday (9/19/2023) has continued its significant bearishness from the end of August by breaking down decisively below a large symmetrical triangle consolidation pattern that has been in place since early May.  The swift and substantial collapse shows price is now trending below all three key SMAs (200-, 100-, and 50-day), which could mean momentum selling could last until the 1.4259 level, with the 1.40 handle providing major support.  To the upside the 1.4500 level remains critical resistance.

Oil

This crude price rally apparently doesn’t want to stop.  The oil market will likely be tight throughout the winter and despite some potential fireworks from the Fed, crude just wants to head higher.  It looks like some hints of economic resilience has energy markets willing to tolerate $90 a barrel oil, which is translating into a rally to test the $100 a barrel level.  When you have some recent oil bears like Citi’s Ed Morse note that that oil prices could go over $100 per barrel “for a short while”, that gives the all-clear signal for the rally to keep on going.

Brent crude topping the $95 a barrel is significant, but today is all about the Fed and that will either trigger recession fears or signal rates will be less restrictive and excess liquidity will remain plentiful.  If the Fed signals higher for longer is here to stay and that hard landing risks are rising, that could give one last major push for the dollar, which might bring down oil prices.

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