Bank of Canada Comes Out Swinging with 25bps Hike, USD/CAD Slides

BoC RATE DECISION KEY POINTS:

• 25bps Hike by the Bank of Canada as Excess Demand Looks More Persistent Than Anticipated.
• Underlying Inflation Remains a Concern as Evidenced by the Data in April.
• BoC Statement Did Remove the Language About How the Central Bank is Prepared to Raise Rates Further if Needed.
• To Learn More About Price Action, Chart Patterns and Moving Averages, Check out the DailyFX Education Section.

The Bank of Canada (BoC) has followed the RBA and delivered a 25bps hike as the Central Bank stressed that excess demand in economy looks to be more persistent than anticipated. According to the statement the BoC feels the rate hike reflects concerns that monetary policy was not sufficiently restrictive to bring supply and demand back into balance.

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On the inflation front the BoC reiterated the upside risks and price pressures as the data in April showed increase in a broad range of goods while service price inflation remains elevated as well. A worrying remark and something I have touched on for the past couple of months is the fear for major Central Banks that CPI inflation could get stuck materially above the 2% target.

The immediate aftermath of the meeting has seen an increase tonear 50% of another hike in July and fully price in further tightening by September.

LOOKING AHEAD AND THE IMPLICATIONS MOVING FORWARD

The Bank of Canada (BoC) remains ahead of the curve when it comes to the hiking cycle having started ahead of its peers. This could partly be the reason why the inflation picture in Canada remains in better position than the Euro Area and the US. Despite this however, BoC Governor Tiff Macklem has maintained that upside risks to inflation remain a concern and despite the pause in rate hikes has emphasized the Central Banks willingness to act if the need arises.

Source: FinancialJuice, ING

The Canadian economy added another 41,400 jobs in April, more than double the 20,000 expected with wages rising and unemployment remaining at just 5%. A further sign of the resilience of the economy came in the form of the Q1 GDP data with a print of 3.1% annualized with consumer spending continuing to rise. These figures do raise questions regarding the inflation fight particularly the strong consumer spending data as the summer approaches. Governor macklem however expects a significant slowdown in the second half of 2023 and given the release of the OECD updated global projections this seems logical and may effectively come to pass. Could this be the end of the hiking cycle from BoC? It may be so but given the uncertainty and surprises in markets over the past 18 months I would not stake my house on it just yet.

MARKET REACTION

USD/CAD Daily Chart

Source: TradingView, prepared by Zain Vawda

USDCAD initial reaction saw an 80 pip drop before finding some support around the 1.3320 area trading at 1.3350 at the time of writing. The bigger picture for USDCAD remains unclear as recent price action has painted mixed signals with higher highs being followed by lower lows. Following the triangle breakout USDCAD failed to clear the resistance area around 1.3650 and appears set to remain rangebound in the near term. The area around 1.3500 in particular may pose a strong hurdle for bulls as we have a convergence of the 50, 100 and 200-day MAs and could cap any attempted push higher. The April 14 low of 1.3300 and the recent high around 1.3650 are likely to be key for the pairs next significant move.

Key Levels to Keep an Eye on:

Resistance Levels

-1.3500 (MA Confluence zone 50,100 and 200-day MA)

-1.3650

Support Levels

-1.3300

-1.3250

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda