USD/CAD Down to the Bottom, After Surprise BOC Hike

Posted Wednesday, June 7, 2023 by
Skerdian Meta • 2 min read

Yesterday the Reserve Bank of Australia delivered a surprise rate hike which gave the AUD a boost, while today the Bank of Canada (BOC) increased its interest rates by 25 basis points unexpectedly, raising them to 4.75% from the previous rate of 4.50%. This decision marked the end of their “conditional pause” period. As a result of this announcement, USD/CAD moved lower, reaching a level of 1.3320.

Analyzing the daily chart, we can see that a significant portion of trading activity has occurred within a defined range as we mentioned in our other CAD posts, with the top at around 1.3660 and the top above 1.33. This range has been holding since September last year. Although there were instances where the price moved above the upper boundary of this range at 1.37018, there have also been modest moves below the lower end around 1.3298. Nonetheless, the majority of price action has remained within the confines of the range area.

Today’s rate hike by the BOC sent the CAD around 100 pips higher against the USD, while other major currencies have turned bearish. So, markets are anticipating a hawkish BOC further ahead.

Highlights of the Bank of Canada Interest Rate Decision

Macklem BOC Oct 26

  • Bank of Canada overnight rate 4.75% vs 4.50% prior
  • Previous BOC rate was 4.50%
  • The market was pricing a 60/40 chance of a hold ahead of the decision
  • The Bank of Canada last hiked rates in January

Statement highlights:

  • Underlying inflation remains stubbornly high
  • Canada’s economy was stronger than expected in the first quarter of 2023
  • Consumption growth was surprisingly strong and broad-based
  • Spending on interest-sensitive goods increased and, more recently, housing market activity has picked up
  • The labour market remains tight
  • The Bank continues to expect CPI inflation to ease to around 3% in the summer
  • concerns have increased that CPI inflation could get stuck materially above the 2% target.
  • The statement no longer says the BOC “remains prepared to raise the policy rate further if needed to return inflation to the 2% target”

Key passage from the statement:

The Bank continues to expect CPI inflation to ease to around 3% in the summer, as lower energy prices feed through and last year’s large price gains fall out of the yearly data. However, with three-month measures of core inflation running in the 3½-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target.

This looks like a one-and-done hike with the final paragraph no longer saying the BOC “remains prepared to raise the policy rate further if needed to return inflation to the 2% target”. Instead, it says:

Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians.

That’s still a hawkish bias but it’s certainly not as explicit and is a warning against pricing in further rate hikes beyond 4.75%, though the market is 50/50 on a July hike currently. Of course, that will depend on how inflation numbers and economic growth develop. The next BOC meeting is on July 12 and will include fresh forecasts via the Monetary Policy Report.

Tomorrow we will hear from BOC deputy Paul Beaudry and he will shape expectations further and explain this decision.

USD/CAD Live Chart

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