USD/CAD oscillates above 1.3600 after BoC’s dovish 50 bps rate hike

• The Bank of Canada hikes rates by 50 bps, less than the 75 bps expected, and the USD/CAD tumbles.
• The BoC will continue its Quantitative Tightening (QT) program.
• USD/CAD jumped toward its daily high at 1.3650 in the release of the headline.

The USD/CAD rises following the Bank of Canada (BoC) monetary decision to lift rates by 50 bps on Wednesday, disappointing market participants, expecting a ¾ of percent increase due to Canada’s economy struggling with inflationary levels not seen in 30 years. Also, the BoC announced that it would continue its policy of quantitative tightening. The USD/CAD is trading at around 1.3619, above its opening price by 0.08%.

Summary of the BoC monetary policy statement

The BoC said global inflation remains high and broadly based, feeling the impact of higher commodity prices sparked by Russia’s attack on Ukraine. The BoC acknowledged that tightening monetary conditions to temper inflation is “weighing on economic activity around the world. As economies slow and supply disruptions ease, global inflation is expected to come down.”

Regarding the international outlook, the BoC expects no growth in the US economy and a recession in the Euro area. While China’s economy appears to have picked up, the property market will keep growth contained.

Domestically, the BoC sees the economy operating in excess demand with a tight labor market. Enough supplies for goods and services keep inflationary pressures high. And the full reopening of the economy “led to a sharp rise in the price of services.”

Even though Canada’s CPI declined to 6.9% from 8.1%, price pressures remain broadly based, impacting the Bank’s preferred measures of core inflation, which “are not yet showing meaningful evidence that underlying price pressures are easing.”

Therefore, the BoC Governing Council agreed that policy rates will need to rise further and would be influenced by the BoC’s Council assessment of the effects of tighter conditions working to slow demand, lower inflation, and how supply disruptions resolve.

USD/CAD Market’s Reaction

The USD/CAD 5 minutes chart shows the pair jumped from around 1.3580 to its daily high of 1.3650, on the headline, due to market participants’ expectations for a hefty rate hike. Of note, the USD/CAD retraced to 1.3600, erasing 50 pips of gains, though it would likely remain consolidated, as the Bank of Canada (BoC) Governor Tiff Macklem will hit the stand, at around 15:00 GMT.

Source: Refinitiv