Bank of Canada may raise interest rates within the next three months as inflation topped its target, short USD/CAD?The possibility of Canada's central bank to hike rates within next three month was largely increased after the overnight inflation data surprised the market as USD/CAD tumbled.

  • Canada's inflation jumped above the Bank of Canada's target of 2% as inflation accelerated to 2.1 percent in November from a 1.4% in October
  •  The average CPI core readings accelerated to 1.73% y/y in November, highest since October 2016 and up from 1.60% a month earlier and the retail sales were a blowout
  •  Bloomberg's data showed that odds of a hike in the first quarter falls from 76.3% to 68.5% before the CPI announcement
  •  The risk reversal term structure is adjusting to this change in sentiment as well, with one-month to six-month risk reversals much lower on the day as the market prices in the chance of further CAD strength
  •  We expect the Bank of Canada to move ahead with two more interest rate hikes by the end of 2018
  •  USD/CAD could move towards 1.2620 in weeks to come
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Fullerton Markets Research Team

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