USD/CAD launched back above 1.2600 level as BoC holds rates, disappoints hawkish bets for surprise rate hike

• USD/CAD surged back above 1.2600 after the BoC disappointed some hawkish bets by holding interest rates steady at 0.25%.
• But it was a hawkish hold, with the bank signaling rate hikes and QT will be coming soon.
• That, plus recovering risk appetite and higher oil prices may limit loonie losses.

USD/CAD surged from the 1.2560s to the 1.2630 area after the Bank of Canada on Wednesday opted to hold interest rates at 0.25%, disappointing calls from a minority of market participants and economists for a 25bps rate hike to 0.50%. Ahead of the meeting, a Bloomberg poll revealed that seven out of 31 analysts were looking for a 25bps rate hike, thus the pricing out of these hawkish bets seems behind the latest bout of loonie weakness. On the session, USD/CAD is now back to trading flat, having been as much as 0.5% lower prior to the policy announcement.

The BoC’s latest policy announcement can be characterised as a hawkish hold. The bank noted that overall slack in the economy had now been absorbed, satisfying the condition for future rate hikes and strongly hinting towards a hike at the next meeting in March. The bank then added that, at the time when interest rates start to rise, it will consider ending balance sheet reinvestments and ways to reduce the balance sheet’s overall size. In other words, while the BoC held off on hiking rates on Wednesday, it signaled that rate hikes and quantitative tightening will be coming very soon.

This might serve to limit loonie downside for the time being, with the BoC looking very likely to at the very least keep pace with the Fed when it comes to monetary tightening. Note also that the backdrop of recovering risk appetite (US stocks are advancing strongly and are now higher on the week) and stronger crude oil prices as geopolitical tensions bubble may combine to shield the risk/commodity-sensitive loonie from further downside. Technicians will note resistance in the 1.2700 area and support in the 1.2450 area as the key levels to keep an eye on.