USD/CAD: Further divergence on rate hike expectations to pummel the loonie – Commerzbank

The Bank of Canada (BoC) surprised markets by delivering only a 50 bps rate hike. USD/CAD hovers around 1.3550. The next direction of the loonie hinges on the Fed’s future moves and global risk sentiment, economists at Commerzbank report.

BoC switches down another gear

“The BoC hiked its key rate by only 50 bps to 3.75%, which came as a surprise to many. That means it has switched down another gear in its fight against stubbornly high inflation rates – following an impressive 100 bps in July and a further 75 in September.

“CAD came under depreciation pressure for a brief moment, but the losses against USD were limited. That is likely to have been due to the hawkish statement but also the slightly more favourable market sentiment and the resulting reduced USD strength.”

“Whether CAD will be able to stand up against USD going forward will mainly depend on the US central bank’s future moves and on global risk factors. If the rate hike expectations for BoC and Fed threaten to diverge further this is likely to put pressure on the loonie. The same goes for increasing USD strength as a result of more pronounced risk-averse market sentiment.”