The Canadian dollar had a busy day on Wednesday in the aftermath of a key Bank of Canada policy meeting. In the European session, USD/CAD was trading quietly at 1.2368, up 0.05% on the day.
BoC surprises by ending stimulus
The Bank of Canada announced on Wednesday that it would end its bond-purchase stimulus program (QE) and maintained its extraordinary forward guidance. The dramatic move caught the markets off guard, as investors were widely expecting that the bank would taper QE to CAD 1 billion, down from CAD 2 billion. The Canadian dollar rose as USD/CAD fell to 1.2301, but the loonie could not consolidate at these levels, as USD/CAD ended the day at 1.2360, down 0.24% on the day.
The BoC went one step further as BoC Governor Tiff Macklem said after the meeting that, “we will be considering raising interest rates sooner than we previously thought.” In his rate statement, Macklem reiterated that the bank would not raise rates before the recovery was complete, which was projected to occur in the “middle quarters” of 2022. Prior to yesterday’s meeting, the BoC had signaled that it expected to raise rates in the H2 of 2022.
The BoC acknowledged that high inflation will likely persist longer than had been expected, but like the Federal Reserve, the BoC continues to insist that inflation, which is running way above the bank’s target of 2%, is temporary. Investors are not buying into the “inflation is transitory” script, as CPI rose 4.4% in September, its highest reading since 2003. For this reason, the markets have priced in a rate hike for January of next year, with five rate hikes projected in 2022. If the BoC is forced into again bringing forward its rate timeline, the Canadian dollar should receive a boost.
USD/CAD Technical
- 1.2355 is fluid. Below there is support at 1.2302
- There is resistance at 1.2422, followed by 1.2475