BoC hike boosts Canadian dollar

Canadian dollar climbs to 1-week high

The Canadian dollar is drifting on Thursday, after posting strong gains a day earlier following the BoC rate decision.

The Bank of Canada raised interest rates by 0.50% on Wednesday, the first G-7 central bank to do so. It marked the BoC’s largest rate hike since 2000. The BoC also announced that it would end bond purchases and begin quantitative tightening (QT). Although the oversize hike and QT announcement had been priced in by the markets, the Canadian dollar still climbed sharply after the announcement, courtesy of Governor Macklem’s forward guidance. Macklem was crystal clear about his intention to continue raising rates, saying “the economy can handle higher interest rates, and they are needed.” He added that the BoC would do whatever was needed to lower inflation back to the “neutral range of 2% and 3%”.

With the Canadian economy in solid shape, the BoC can continue on its rate-cycle path. The Overnight Rate is now at 1.00%, and investors can expect 100-200 basis points of additional tightening before the year’s end. This will keep the BoC in sync with the Fed on monetary policy, which should allow the Canadian dollar to withstand a Fed-powered US dollar as rates move higher in the US.

A sharp increase in rates should wrestle inflation lower, but it will require a dexterous hand to ensure that the economy has a ‘soft landing’, whereby higher interest rates don’t choke off growth, which could result in a recession. The BoC will have to carefully monitor the economic landscape before hiking rates. Still, high inflation, strong growth and a robust labor market are all ingredients for what could be another 0.50% rate increase when the BoC holds its next meeting in the beginning of June.

.

USD/CAD Technical

  • USD/CAD briefly broke below support at 1.2531 in the Asian session. Below, there is support at 1.2444
  • There is resistance at 1.2660 and 1.2747

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Kenny Fisher

Kenny Fisher

Market Analyst at OANDA
A highly experienced financial market analyst with a focus on fundamental analysis, Kenneth Fisher’s daily commentary covers a broad range of markets including forex, equities and commodities. His work has been published in several major online financial publications including Investing.com, Seeking Alpha and FXStreet. Based in Israel, Kenny has been a MarketPulse contributor since 2012.
Kenny Fisher

Latest posts by Kenny Fisher (see all)