Canadian Dollar Outlook: Bank of Canada Signals a Pause in Rate Hikes is Looming
16:40, 7 December 2022
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Bank of Canada Hikes 50bps But Signals Pause is Looming
In its final monetary policy meeting of the year, the Bank of Canada announced a 50bps in the overnight rate to 4.25%. This had been a slight surprise to markets given that money markets had priced in around 30bps of tightening. In turn, this prompted a knee-jerk move higher in the Canadian Dollar with USD/CAD falling to session lows of sub 1.36. However, there was a dovish tilt with the statement in which the central bank appears to indicate that their hiking cycle is drawing to a close. The bank stated that the Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.
Now, of course, the bank will remain data dependent as such, should inflation remain sticky, alongside a tight jobs report, there will be little choice but to continue hiking. That said, the bar to hike has increased somewhat going forward.
Falling Oil Prices and Stocks Dictating CAD over BoC Policy
Looking more specifically at the Canadian Dollar, interest rate hikes haven’t had a lasting impact on the Loonie. This was most apparent after CAD failed to hold onto gains following a surprise 100bps hike in July. As such, I suspect a similar lack of lasting impact on the currency following today’s decision. Oil prices remain on the back foot and the deteriorating risk environment is the two prominent determinants for CAD price action at present. Earlier today, Russian President Putin hardened his stance with regard to the war in Ukraine, having talked up Russia considering nuclear weapons as a response to an attack which further weighed on risk sentiment.
USD/CAD chart: 1-minute timeframe
USD/CAD (Inverted) vs Brent Crude Oil