Bank of Canada recap: BOC surprises traders with a 100bps hike, USD/CAD falls below 1.30

As we noted in our BOC preview report, markets were confident that the Bank of Canada would raise interest rates by 75bps…but BOC Governor Tiff Macklem and company defied expectations, opting instead for a 100bps hike to 2.50%. Up from just 0.25% at the start of the year, Canada’s overnight rate is now tied with New Zealand’s for the highest target rate among major central banks.

Highlights from the BOC’s monetary policy statement follow (emphasis mine):

Inflation continues to rise, and price pressures are broadening. Consumer price index (CPI) inflation will average close to 8% in the middle quarters of 2022.
The Canadian economy is overheated, and labour markets are tight. The unemployment rate is at a series low, and elevated job vacancies and widespread labour shortages are pushing up wage growth.
With global growth moderating and higher interest rates dampening domestic spending, growth in Canada is projected to slow from 3½% in 2022 to 1¾% in 2023 and 2½% in 2024.
Domestic price pressures are expected to abate, global supply chain problems are anticipated to resolve gradually, and energy prices are projected to decline. Inflation in Canada is anticipated to decrease to roughly 3% by the end of 2023 and return to the 2% target by the end of 2024.
The Bank is guarding against the risk that high inflation becomes entrenched because if it does, restoring price stability will require even higher interest rates, leading to a weaker economy.

Notably, the central bank revised down its forecast for GDP growth in 2022 and 2023 (to 3.5% and 1.8% respectively) while revising up its inflation forecasts for 2022 (7.2%), 2023 (4.6%), and 2024 (2.3%). In a small silver-lining for those who were expecting a more modest move, the last bullet hints that the central bank may be “front loading” its rate hikes, meaning the pace of interest rate increases could slow or pause as we move into the fourth quarter, but for now the main takeaway is that the BOC is more hawkish than expected.

BOC Governor Macklem is starting his press conference as we go to press – be sure to follow us on Twitter for any salient updates from his comments!

Technical view: USD/CAD

Technically speaking, USD/CAD saw a quick drop in the wake of the BOC announcement, essentially offsetting the spike in the greenback following this morning’s hotter-than-expected US CPI report. Now, the pair sits in the middle of its well-defined 1-month range between 1.2850 and 1.3080. In the short-term, the BOC’s relatively hawkish stance could keep USD/CAD capped below 1.3080.

Source: StoneX, TradingView

Traders will soon shift their focus to the FOMC monetary policy meeting at the end of the month, with a 100bps rate hike from the Fed now on the table following the BOC’s move and elevated US inflation reading.

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.