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USD/CAD: Bank of Canada Hikes by 100 Basis Points

USD/CAD: Bank of Canada Hikes by 100 Basis Points

Brendan Fagan, Contributor


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Bank of Canada, USDCAD – Talking Points

  • Bank of Canada hikes by 0.75% as inflation remains elevated
  • USDCAD spikes lower after lager-than-expected hike
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The Bank of Canada elected to raise it’s benchmark interest rate by 1.00% as the central bank continues to battle rampant and historic inflation. This morning’s rate hike brings the key policy rate to 2.50%, with inflation data set to come out next week. In immediate trade, USDCAD spiked lower below 1.30. Governor Tiff Macklem is set to speak at 11 AM EST.

The Canadian economy continues to run red hot despite recent efforts from the BoC to cool activity. Central banks around the globe have rushed to tighten policy, as inflationary pressures remain widespread and persistent. Canada’s resource-rich status has seen the economy perform well during this recent period of elevated commodity prices. Given underlying economic strength, swaps traders see the BoC taking the policy rate above 3.5% later this year, making it one of the most hawkish tightening paths in the world.

In Canada, inflation pressures remain top of mind. Wage inflation is growing while unemployment remains at historical lows. Recent BoC surveys show consumers and businesses fully expect inflationary pressures to persist. Inflation data is set to release next week, with some economists forecasting a reading above 8%. For context, the year-over-year reading in May was 7.7%.

Wednesday’s hike is extremely notable, as it brings the Bank of Canada into the middle of their “neutral range” of 2-3%. Another large rate hike at the next meeting in September could bring the BoC above the high end of its neutral range, which still may not be enough to stem the tide of inflation.


USDCAD 5 Minute Chart

Chart created with TradingView

USDCAD broke lower in immediate trade following the larger-than-expected hike. Price has failed to break above resistance around 1.3050, with a triple-top formation brewing on the daily timeframe. The Canadian Dollar has struggled of late as the US Dollar remains strong and oil continues to weaken over recession fears. While US CPI was unable to push USDCAD through overhead resistance, the upcoming FOMC meeting at the end of the month may begin to emerge as the potential catalyst for a topside breakout.


USDCAD 1 Hour Chart

Please add a description for the image.

Chart created with TradingView

BoC Governor Tiff Macklem Comments:

  • The credibility of the BoC's inflation target is being tested, but remains credible
  • Front-loading rate hikes helps minimize the need for higher interest rates in the future
  • Top end of the BoC policy rate is "slightly" above neutral
  • A 100 bps rate hike is extremely unusual and reflects unique circumstances
  • Front-loaded tightening cycles are typically followed by softer landings
  • We anticipate a soft landing, but the route has narrowed due to elevated and persistent inflation

Stay tuned, more to follow….

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--- Written by Brendan Fagan, Intern

To contact Brendan, use the comments section below or @BrendanFaganFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.