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CAD strengthens following a 75 bps rate hike

This afternoon, the Bank of Canada raised interest rates by 75 basis points to 3.25%, which was in line with the market's expectations.

The Canadian dollar erased earlier losses as the USD came under selling pressure during the US session on Wednesday, bringing the USD/CAD pair to daily lows of around 1.3145.

Earlier today, the Bank of Canada raised interest rates by 75 basis points, from 2.50% to 3.25%, causing no imminent reaction in the Canadian dollar.

Bank of Canada remains committed to fighting inflation

Given the inflation outlook, the central bank stated that they would need to increase rates further. However, the BoC asserts that core inflation is still widening, especially in the services sector. It reiterates its commitment to price stability, saying it would take whatever steps necessary to reach its 2% target.

We will lower our GDP predictions for Canada in an updated forecast that will be presented next week since the BoC looks willing to sacrifice more growth than anticipated to get inflation down faster. We must consider if the Bank is exploring a rate of 3.75% even though they could choose to accept as little as an extra quarter point if they had been satisfied that 3.5% was the maximum.

โ€œTherefore, the 75 bps hike to an overnight rate of 3.25% was widely expected, but we took note that the final paragraph opted to retain the view that โ€œinterest rates will need to rise further.โ€ Weโ€™ll therefore be lifting our target for the end of this tightening cycle, with another 25-50 bps on tap for October.โ€ Analysts at CIBC pointed out after the decision.

More Canadian data

The Ivey Purchasing Managers Index for August, which was reported on the Canadian economic docket, came up at 60.9, seasonally adjusted, while the unadjusted increase was 57.1.

You may also read:ย Chinese yuan weakens โ€“ the central bank had to step in

In the meantime, per the Statistics Canada report released on Wednesday, Canada’s merchandise trade surplus with the rest of the world decreased from C$4.88 billion in June to C$4.05 billion in July. This result was a tiny bit better than the market’s forecast of a surplus of C$3.8 billion.

The report said that following six consecutive months of gains, overall exports fell 2.8% to $68.3 billion in July. To reach $64.2 billion, total imports decreased 1.8% in July, marking the first decline since January.

Loretta Mester, president of the Cleveland Fed, was being covered by news outlets. According to Mester, the most recent labor market data showed signals of slowing. She noted that rather than “one specific meeting,” investors should pay attention to the trajectory of interest rates. Additionally said that she would decide the amount of rate increase at the September meeting and that she is not yet satisfied that inflation has peaked.

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