USD/CAD slides towards 1.2630s post-BoC 50 bps rate hike

• The Bank of Canada (BoC) lifts rates to the 1% threshold and will begin Quantitative Tightening on April 25.
• The USD/CAD plummeted as volatility increased, reaching a daily low at 1.2625 on its initial reaction.
• USD/CAD Price Forecast: The pair is upward biased, but BoC Governor Tiff Macklem’s press conference will trigger more volatility in the pair; caution is warranted.

The Canadian dollar soared after the Bank of Canada raised the interest rate policy from 0.50% to 1% and announced it would begin its Quantitative Tightening by April 25. At the time of writing, the USD/CAD is seesawing around the 1.2630-40 area as market participants digest the BoC monetary policy report.

Market’s Reaction

The USD/CAD nose-dived towards 1.2625, followed by an upward reaction to 1.2675, followed by a retracement to the mid-level between 1.2600-1.2700, settling around those levels.

Summary of the Bank of Canada statement

The BoC Governing Council judges that rates need to rise further and emphasizes that interest rates would be the bank’s primary tool for setting monetary policy. The BoC reiterated that they would guide the timing and pace of further rate hikes, as the BoC remains committed to achieving the 2% inflation target.

Regarding Quantitative Tightening (QT), the BoC said it would begin on April 25, halting the reinvestment phase. The BoC added that “Maturing Government of Canada bonds on the Bank’s balance sheet will no longer be replaced and, as a result, the size of the balance sheet will decline over time.”

Concerning Ukraine, the BoC said that elevated prices in oil, natural gas, and commodities are adding to global inflation. Supply chain constraints, a consequence of the war, weigh on activity and would be the primary drivers of “substantial upward revision to the Bank’s outlook for inflation in Canada.”.

The BoC added that Canada’s economy is strong and is moving into excess demand. The bank emphasized that labor markets are tight, and businesses report they have difficulty meeting demand, passing higher input costs to customers. Furthermore, the central bank added that growth looks to have been stronger in Q1 than projected in January and is likely to pick up in the second quarter.

Therefore, the interest rate differential so far benefits the Canadian dollar. However, in the mid to long-term, Fed’s hawkish expectations could favor the greenback, as money market futures expectations show a 94% chance of the Federal Reserve hiking rates to the 1% threshold, the same level reached by the BoC in April.

Later at 15:00 GMT, the Bank of Canada would have its press conference, led by Governor Tiff Macklem and Carolyn Rogers, Senior Deputy Governor.

BOC Press Conference: Governor Macklem speech live stream – April 13

USD/CAD Price Forecast: Technical outlook

The USD/CAD 1-hour chart is upward biased, and on the BoC rate decision, the USD/CAD reacted downwards, piercing below the 50-hour Simple Moving Average (SMA) and the daily pivot, each lying at 1.2634 and 1.2630, pushing the pair towards the 1.2620s area.

Upwards, the USD/CAD first resistance would be the R1 daily pivot at 1.2680. A breach of the latter would expose the psychological 1.2700 mark, followed by the R2 daily pivot at 1.2710. On the flip side, the USD/CAD first support would be the 50-hour SMA and the daily pivot at the 1.2634-1.2630 area. A decisive break would expose the 100-hour SMA at 1.2611, followed by the S1 daily pivot right at the 1.2600 mark.