USD/CAD pulls lower into mid-1.2500 as loonie rallies post 50bps BoC hike

• USD/CAD has continued to pullback post-50 bps BoC rate hikes, as the loonie benefits amid higher equity and oil prices.
• A softening of the US dollar amid fading US yields also helped.
• The pair is now probing its 21DMA in the mid-1.2500s, having pulled back from earlier highs in the upper 1.2600s.

USD/CAD has continued to press lower in recent hours and, as the end of the US session beckons, the pair is currently trading at session lows in the 1.2550s, down some 0.7% on the day. The US dollar is seeing a modest pullback no thanks to a slight drop in yields across the US curve, despite much hotter than expected US Producer Price Inflation data released earlier in the day and, more recently, a batch of hawkish remarks from Fed’s Christopher Waller.

Waller said he supports a 50 bps rate hike at the upcoming meeting and potentially the next two meetings after that, and that the data supports this course of action. But with a lot of Fed hawkishness already in the price, the buck did not respond. While US dollar weakness explains some of USD/CAD’s pullback from earlier highs above its 50-Day Moving Average in the 1.2670s, a more important catalyst was the latest BoC meeting.

The central bank lived up to the hype in delivering a 50 bps rate hike and also announcing the start of (passive) balance sheet runoff as of 25 April. The bank unsurprisingly signalled that more rate hikes lay ahead, potentially in 50 bps intervals. With uncertainty about the risk of a potential dovish BoC surprise gone, loonie bulls got the green light to pile in and push the Canadian currency higher to reflect strength in oil and stock prices.

At current levels in the mid-1.2500s, USD/CAD is now probing its 21DMA (at 1.2543) one again. If oil continues to rally, if equity market sentiment continues to improve and if US yields continue their current consolidation below recent highs, USD/CAD is in with a shot of dropping back towards annual lows in the 1.2400 region.