Bank of Canada hikes rates by 50bps. More to come?

The Bank of Canada hiked rates by 50bps to bring its overnight rate to 4.25%.  This may have come to a surprise to some market participants as the consensus was split between a hike of 25bps and 50bps.  Ultimately, the BOC went with a hike of 50bps.   In addition, the BOC said it will continue to complement its increase in rates by continuing with quantitative tightening.  Members also noted that economic growth was strong, however they expect it to stall at the end of 2022 and early 2023.  They also added that the labor markets are still too tight, and that inflation remains high.  However, the statement may have been slightly more dovish, as the central bank pointed out that they “will consider whether the policy interest rate needs to rise further”.    Previously, the statement simply read that the policy rate “needs to rise further”. 

Q3 GDP for Canada released last month was 2.9% vs a Q2 reading of 3.2%.  October’s headline inflation print was unchanged at 6.9% YoY, while the core rate fell to 5.8% YoY from 6% YoY in September.  The BOC targets 2% inflation.  In addition, the labor market has been robust, adding 108,300 new jobs in October and 10,100 new jobs in November.  Both months added more full-time jobs while the number of part-time jobs decreased.  The Ivey Purchasing Managers Index for November was 51.4, stronger than October’s 50.1 reading and remaining above the expansion/contraction level of 50.

Although USD/CAD had been moving higher for the past few weeks, the pair had been drifting lower into the BOC decision.  Once the 50bps rate hike was announced, USD/CAD fell from 1.3646 down to 1.3588, despite the slightly dovish tone to the statement.  This may have been a matter of “Buy the rumor, sell the fact”.

Source: Tradingview, Stone X

On a daily timeframe, USD/CAD made a Year-to-Date low on April 5^th at 1.2403.  The pair then moved aggressively higher and broke through a rising trendline (green) on September 21^st, near 1.3415, which ultimately led to a Year-to -Date high of 1.3978 on October 13^th.   USD/CAD then formed a head and shoulders pattern off the highs, breaking the neckline on November 4^th near 1.3503.  The pair began moving lower on its way to the head and shoulders target near 1.3038, however was halted at horizontal support near 1.3224.  USD/CAD moved higher back above the neckline, which invalidated the head and shoulders pattern, and formed an ascending wedge.  Expectations are that price will break lower from an ascending wedge, however, on December 6^th, the pair closed above the top trendline of the pattern.  But with today’s move lower after the BOC announcement, could this have been a false breakout?

Source: Tradingview, Stone X

On a 240-minute timeframe, USD/CAD traded right up to the 61.8% Fibonacci retracement level from the highs of October 13^th to the lows of November 15^th, near 1.3690. It now appears to be moving lower, back into the rising wedge.  If Tuesday’s move does prove to be a false breakout, first support is at the previous neckline of the head and shoulders pattern near 1.3503. Below there, support is at the bottom rising trendline of the ascending wedge near 1.3435 and then the lows of December 5^th at 1.3374. However, if USD/CAD holds and the pair bounces, the first resistance above today’s high is horizontal resistance at 1.3808, then the highs from October 13^th at 1.3978.

Source: Tradingview, Stone X

The Bank of Canada hiked rates 50bps today.  However, with the expectation of slowing growth, will the BOC hike again in January?  Markets will get a look at the November and December CPI reports before the next meeting.  This may be the key as to what the Bank of Canada will do next!