USD/CAD drops back below 1.3600 as the post-BoC reaction fades

• The USD resumes its downward trend and returns below 1.3600.
• The Canadian dollar spiked down after the BoC's "bearish hike".
• USD/CAD seen at 136 by year-end despite BoJ slowing down – BofA.

The US dollar resumed its bearish trend on Wednesday, retreating below 1.3600 after having spiked up to 1.3650 following the Bank of Canada’s bearish monetary policy decision earlier today.

The Canadian dollar dips after BoC's monetary policy decision

The Bank of Canada announced a 50 basis point hike, instead of the 75 bp hike the market had anticipated, and pointed out to further monetary tightening ahead even If, as they reckon, the economy might be entering a slight recession over the coming quarters.

According to the statement, future hikes will be influenced by the bank’s assessment of "how tighter monetary policy is working to slow demand, how supply challenges are resolving and how inflation and inflation expectations are responding”

On the other hand, the US dollar remains vulnerable, as the market starts to assume a slowdown in the Federal Reserve’s monetary tightening cycle. Although a 75 bp hike in November is already priced in, the recent downbeat macroeconomic data in the US suggests that the bank’s sharp rate hike is damaging economic growth, which might add pressure to the bank to approve a 0.50% hike in December.

USD/CAD, seen at 1.36 by year-end – BofA

Currency analysts at Bank of America see the pair at 1.36 by year-end, despite BoC slowing down: “We expect the actual delivery of a BoC downshift to allow CAD rates to continue to outperform those of the US. USD/CAD appeared to be overbought in September due to the August inflation surprise and broad risk-off sentiment in the market. The latest inflation prints should provide some short-term tailwind for CAD ahead of the BoC meeting (…) We keep our year-end forecast at 1.36 for USD/CAD.”

Technical levels to watch