BoC and Fed send CAD for a ride

USD/CAD has edged higher on Thursday and briefly pushed above the 1.27 line for the first time in three weeks.  The Canadian dollar continues to lose ground and is down 1% this week.

Wednesday was a busy day on the central bank watch, with both the Bank of Canada and the Federal Reserve holding meetings. The BoC meeting was live, with analysts split as to whether the bank would raise rates. In the end, the bank opted to leave rates unchanged at the record low of 0.25%.

BOC holds the course on rates

The BoC has decided to take the patient approach and will likely raise rates in March, the same time that the Fed is expected to make its first hike of 2022. With the markets projecting five or even six rate hikes this year, the BoC will be busy. The drivers behind an aggressive series of rate hikes in the improvement in the labour market, despite Covid, and surging inflation which has hit a 30-year high. Inflation and employment will be key factors for the BoC in deciding when to implement these rate hikes. It is crucial that the BoC communicates effectively with the markets, and after Wednesday’s meeting, BoC Governor Tiff Macklem stated that the BoC is committed to lowering inflation.

In the US, Federal Reserve Chair Powell had a hawkish message for the markets, more in what he didn’t say than what he actually said. Powell did not rule out raising rates at every meeting and was careful not to make any commitments on the course of rate increases, although a March lift-off seems a done deal. The Fed was also vague about a date for reducing the balance sheet, with the FOMC statement stating that the Fed “expects that reducing the size of the Fed’s balance sheet will commence after the process of increasing the target range for the federal funds rate has begun.”  This gives the Fed plenty of wiggle room in deciding when to scale back the balance sheet, with June being a likely start date.

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USD/CAD Technical

• • 1.2632 has switched to support as USD/CAD continues to move higher. The next support level is 1.2495
  •  USD/CAD is testing resistance at 1.2679. Above, there is resistance at 1.2769

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