BoC’s 25bps Rate Hike Receives Dovish Reaction, Loonie on Offer

USD/CAD ANLAYSIS

• Expected 25bps increment leaves CAD floundering.
• 2023 peak rates priced in by money markets.
• Descending triangle still in play.

USD/CAD FUNDAMENTAL BACKDROP

The Canadian dollar reacted responded negatively with most analysts expectant of a 25bps interest rate hike by the Bank of Canada (BoC) – see economic calendar below. The press release cited persistent elevated inflation as well as more resilience from the U.S. and Europe in terms of an economic slowdown but was unable to deter markets from pushing the loonie lower against the USD.

USD/CAD ECONOMIC CALENDAR

Source: DailyFX Economic Calendar

From a Canadian perspective (refer to graphic below), the labor market remains tight (purple) with low unemployment levels and regardless of softening inflation (yellow), earnings (green) is not falling at a rates which many expected to be the case. That being said, higher rates should slowly filter through to the economy reducing household spending moving closer and closer to the 2% inflation target range in the long-term.

CANADIAN ECONOMIC VARIABLES

Source: Refinitiv

A key quote from the statement shown below highlights the BoC’s willingness to tighten further should the data reflect the need to but consensus around this rate hike being the peak for 2023 as shown in the table below has shown the markets preference regarding the BoC.

“If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases. Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target, and remains resolute in its commitment to restoring price stability for Canadians.”

BOC INTEREST RATE PROBABILITIES

Source: Refinitiv

TECHNICAL ANALYSIS

USD/CAD DAILY CHART

Chart prepared by Warren Venketas, IG

Price action on the daily USD/CAD chart exhibits a strong reaction from CAD bears but remains sandwiched in the developing descending triangle pattern (black) and does not invalidate a leg lower just yet.

Key resistance levels:

Key support levels:

IG CLIENT SENTIMENT DATA: BEARISH

IGCS shows retail traders are currently LONG on USD/CAD , with 52% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment resulting in a short-term downside bias.

Contact and followWarrenon Twitter:@WVenketas