The US dollar has been under selling pressure today, sending the USD/CAD pair below the 1.36 handle as investors digested the latest Bank of Canada (BoC) policy meeting.
BoC hikes rates, signals end to tightening cycle
Amidst a divided panel of economists, with roughly half anticipating a 25bps rate hike from the BoC and the other half predicting a 50bps hike, the Bank of Canada just revealed a 50bps hike, its sixth straight oversized boost to interest rates.
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However, in a dovish pivot, it suggested that rates may not need to rise further, and Bloomberg notes that the decision opens the door to a pause in the rate hiking cycle.
Strangely, the Canadian dollar strengthened after the decision, which had not been the case for the US dollar when the Fed indicated a slowdown in rate hikes.
The BOC indicated in its statement that the “Governing Council will assess whether the policy interest rate needs to be raised further to restore supply and demand balance and return inflation to its target level.”
The new phrasing of “evaluating whether” is a significant departure from the bank’s October statement, which stated that it “expects the policy interest rate will need to increase further.”
“The improvement in inflationary trends sets the stage for an imminent pause by the BoC to assess the impact of previous rate hikes. Such a pause would certainly help allay fears of a recession and a prolonged period of house price deflation,” economists at the National Bank of Canada expect the CAD to outperform the USD in 2023.
Additionally, officials highlighted that Canada’s third-quarter gross domestic product was “stronger than projected” but that rising borrowing rates are beginning to dampen domestic demand.
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Consequently, policymakers continue to anticipate an economic slowdown: “results since the October MPR reinforce the Bank’s assessment that growth will virtually halt through the end of this year and the first part of next year.”
In other news, the Canadian dollar remains undermined by the falling oil prices as both the WTI and Brent benchmarks hit their respective one-year lows.
Short-term downtrend continues
The USD/CAD pair remains in a bullish trend (downtrend for the Canadian dollar), as the price trades above its 21-day moving average. Moreover, the USD has jumped above the short-term bearish trendline, changing the outlook to bullish (again).
The next target for bulls should be at 1.38 at November highs. Conversely, the support is seen near 1.35, where the 21-day EMA is converged with the broken downward trend line.