Bank of Canada maintains policy
The Canadian dollar had a muted reaction to Wednesday’s Bank of Canada policy decision. As expected, the bank maintained the cash rate at an ultra-low 0.25%. The BoC also kept its forward guidance, saying that it expected to raise rates in the “middle quarters of 2022”. Admittedly, that timeline is somewhat vague and provides the bank with plenty of wiggle room if needed.
There were no surprises at the meeting, although some market participants may have been looking for a more hawkish rate statement, given the superb employment report last week. In fact, there are now 185 thousand more people working than in February 2020, the last month prior to Covid.
With Canada’s economy showing strong growth and inflation at a 30-year high, it’s understandable why the markets have priced in a potential hike in the first quarter, ahead of the bank’s guidance. The statement acknowledged that inflation is high and projected strong growth of 4% in 2022, but nevertheless did not bring forward its guidance despite these risks to the upside. This cautious stance stems in large part from the uncertainty surrounding Omicron. The variant’s symptoms have been less severe than previous Covid variants, but it is also more contagious, and it will take time to determine if the Covid vaccines are as effective against Omicron.
Another factor that has an impact on the Canadian dollar is oil prices, as Canada is a major oil producer. The November dip in oil prices weighed on the Canadian currency, but oil has found its footing and a cold winter in North America and Europe could send oil prices towards the USD 100 level, which would bode well for the Canadian dollar.
- USD/CAD has support at 1.2618. Below, there is a monthly support line at 1.2477
- The pair is testing resistance at 1.2666. Above, there is resistance at 1.2898
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