Canadian dollar jumps on BOC hike

The Canadian dollar has posted strong gains on Wednesday. USD/CAD is trading at 1.26695 in the North American session, down 0.59% on the day.

BoC raises rates

The Bank of Canada went ahead and raised rates earlier today by 0.25%, to 0.50%. Prior to today, the BoC had maintained the ultra-low 0.25% rate at 15 straight meetings, since the start of Covid-19 back in March 2020. With inflation running at a 30-year high, there was really no doubt that the BoC would make today’s move. It’s unclear when the central bank will press the rate trigger again, although another hike in April would show that that the central bank means business and is determined to wrestle inflation back to more manageable levels. The markets have priced in six hikes in the next 12 months, and even if the BoC doesn’t quite match that pace, it’s clear that the central bank has embarked on a rate hike cycle towards normalization.

The eruption of war in Ukraine has raised concerns that central banks may slow the pace off of rate hikes, given the cloudy global economic outlook and the relentless surge in the price of oil. However, the rise in oil, although rough on consumers, will boost the Canadian economy as Canada is a major oil exporter.

With the markets glued to events in Ukraine, it’s easy to forget that there are key economic events occurring as well. Federal Reserve Chair Jerome Powell testified earlier on Capitol Hill. In prepared remarks, he stated that the Fed intends to raise rates at the March meeting, but the Russian invasion of Ukraine has resulted in significant uncertainty with regard to future hikes. The Fed is expected to embark a rate-tightening cycle at the upcoming meeting, but policy makers may have to scale back the number of hikes given the new economic backdrop and the relentless surge in oil prices, which have punched above the 100 dollar level. There are significant concerns about stagflation if central banks raise rates too quickly.

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USD/CAD Technical

• USD/CAD faces resistance at 1.2825 and 1.2950
• There is support at 1.2629 and 1.2558

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