Bank of Canada, USDCAD – Talking Points
- Bank of Canada hikes benchmark interest rate by 0.50%
- USDCAD rockets higher, trading back through 1.3600
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The Bank of Canada (BoC) has raised its benchmark interest rate by 50 basis points, underwhelming a market that was priced for 75 basis points. This follows a 75 basis point (bps) rate hike at the previous meeting in September, and brings the policy rate to 3.75%. The BoC has also notably revised growth forecasts lower, as higher borrowing costs begin to take their toll on the economy. Inflation has also been forecasted to fall below 3% by the end of 2023, which is within the Bank of Canada’s target range.
The policy statement indicated that future rate hikes will be determined by the response of the economy to higher rates, saying “Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflationary expectations are responding.”
The statement also indicated that inflation remains broad based, and that there is no evidence that inflationary pressures are subsiding. The risk remains that elevated inflation becomes entrenched in expectations, which may indicate that the BoC may continue to hike but at a slower pace. The Bank of Canada also reiterated that the neutral rate for the economy is around 4.5%, which roughly equates to what the market has priced for a terminal rate.
Canadian Economic Calendar
Courtesy of the Daily FX Economic Calendar
Canada’s situation remains interesting, given the high levels of leverage within the economy. Households remain extremely indebted, and policymakers remain attentive to the risks associated with raising interest rates swiftly. In a survey released a few weeks ago, Canadian households indicated that they see inflation at 5.2% in two years, well above the BoC’s target.
Despite the severe slowdown in growth and heightened risks of recession, BoC Governor Tiff Macklem continues to beat a hawkish drum. In comments made recently, Macklem has reiterated that persistently high inflation is a much larger issue than a slowdown in growth.
USDCAD 15 Minute Chart
Chart created with TradingView
Following the rate hike, USDCAD soared through 1.3600 as the smaller rate hike disappointed against market expectations. The pair has cooled significantly over the last week as the US Dollar has lost some of its recent strength. Markets have looked to price in a less hawkish Fed, with US Treasury yields retreating slightly from cycle highs. Despite today’s BoC decision, the ball firmly remains in the Fed’s court when it comes to USD crosses. Should Powell once again talk down the recent market rally at next week’s FOMC meeting, USDCAD may look to trade back to the top end of the recent range near 1.3840.
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— Written by Brendan Fagan
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