Canadian dollar rises, markets eye BoC

The Canadian dollar is showing some strength in today’s North American session. USD/CAD is trading at 1.3649, down 0.41%.

Bank of Canada expected to hike rates by 0.75%

This week’s calendar is unusually light, with only two events out of Canada. Both releases, however, could have a significant effect on the movement of the Canadian dollar. The Bank of Canada will make its rate announcement on Wednesday, with the August GDP release on Friday.

What can we expect from the BoC? The Bank has not been shy about raising rates, having hiked some 325 points this year. Similar to the case in the United States, inflation has proven to be stickier than anticipated, as the sharp rate-hike cycle is yet to cause a peak in inflation. In September, headline inflation ticked lower to 6.9%, down from 7.0% in August. Still, the reading was higher than the consensus of 6.8%. Core inflation remains even more stubborn and rose unexpectedly to 6.0%, up from 5.8% and above the forecast of 5.6%.

Until a couple of weeks ago, the markets had been expecting the BoC to deliver a 0.50% hike at tomorrow’s meeting, but the September inflation data has raised the likelihood that policy makers will come out with guns blazing and increase rates by 0.75%. This would bring the cash rate to an even 4.0% and would be the highest rate level in the G-7.

The steep rise in rates may not have curbed inflation, but it has caused significant economic pain to households and businesses and raises the likelihood of a recession. The BoC would love to ease up on oversize rate hikes but has made clear that inflation is public enemy number one and until inflation shows signs of peaking, it will continue to raise rates. A 0.75% hike will help the Canadian dollar keep pace with its US cousin, as the Federal Reserve is almost certain to deliver a 0.75% hike next week.

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USD/CAD Technical

• USD/CAD is testing support at 1.3656. Below, there is support at 1.3467
• 1.3718 and 1.3807 are resistance lines

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