The Canadian dollar is slightly lower on Tuesday. In the European session, USD/CAD is trading at 1.3620, up 0.24%.
What does the Bank of Canada have planned?
The Bank of Canada has been aggressive in its tightening, including a whopping full-point hike in July, which brought the cash rate to 2.50%. The BoC has been gradually easing since then, raising rates by 75 bp and then 50 bp, bringing the cash rate to 3.75%. Will the trend continue on Wednesday? According to the markets, probably yes. There is a 72% chance of a 25 bp move, with a 28% likelihood of a second straight 50 bp move.
At the October meeting, there was a 50/50 split over whether the BoC would raise rates by 50 or 75 bp, and the Bank opted for the more conservative move. With the Canadian economy showing signs of slowing down amidst an uncertain global outlook, a modest 25-bp hike would make sense. Still, it must be remembered that inflation remains very high at 6.9% and the BoC has shown that it is willing to keep the rate pedal on the floor if necessary. If the BoC goes for the 50 bp increase, it would be viewed as a hawkish surprise which would likely boost the Canadian dollar.
What can we expect from the BoC in 2023? The terminal rate is projected at around 4.5%, which would mean several more rate hikes early in the New Year. Of course, rate policy will be heavily dictated by key data such as employment, consumer spending and inflation. In addition, the BoC will want to keep pace (or close to it) with the Federal Reserve, which is widely expected to raise rates by 50 bp next week.
- USD/CAD is testing resistance at 1.3619. Above, there is resistance at 1.3762
- There is support at 1.3502 and 1.3359
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