USD/CAD: Loonie is likely to continue to find it difficult to gain significant ground – Commerzbank

The Bank of Canada (BoC) surprised with a whopping 100 basis points rate hike to 2.5%. The loonie benefited against the USD, but gains were limited. Economists at Commerzbank expect the Canadian dollar to struggle to beat the US dollar.

BoC is giving absolute priority to fighting inflation

“The BoC raised its overnight rate yesterday by a whopping 100 bps to now 2.5%. In its statement, it explained that it was thereby front-loading interest rate hikes. In doing so, it wants to counter the risks of a wage-price spiral, and it signaled further interest rate hikes.”

“The interest rate decision, statement and monetary policy report underpin the fact that the BoC is giving absolute priority to fighting inflation and is willing to take rigorous measures. We expect further significant rate hikes.”

“ In addition to the risk-off mood in the markets, uncertainty about how high the BoC will push its key interest rate and whether a soft landing will be successful or whether a recession is imminent is likely to contribute to this.”

“The BoC's decisive action is likely to influence market expectations regarding other central banks, such as the US Federal Reserve in particular, it could fuel rate hike expectations and ultimately global recession fears. Against this backdrop, the loonie is likely to continue to find it difficult to gain significant ground for the time being.”