- The Bank of Canada (BoC) raises rates to the 1% threshold and will begin quantitative tightening on April 25.
- USD/CAD tumbled as volatility increased, hitting a daily low at 1.2625 in its initial reaction.
- USD/CAD Price Forecast: The Pair Is Skewed To The Upside, But BoC Governor Tiff Macklem’s Press Conference Will Cause More Volatility In The Pair; caution is warranted.
The CAD soared after the Bank of Canada raised policy interest rates from 0.50% to 1% and announced that it would start its quantitative tightening on April 25. At the time of writing this article, the USD/CAD hovers around 1.2630-40 area as market participants digest BoC monetary policy report.
market reaction
USD/CAD nosedived towards 1.2625, followed by a bullish reaction to 1.2675, followed by a pullback to the mid 1.2600-1.2700 level, settling around those levels.
Bank of Canada Statement Summary
The BoC Governing Council judges that rates should rise further and stresses that interest rates would be the bank’s main tool for setting monetary policy. The BoC reiterated that it would guide the timing and pace of further rate hikes, as the BoC remains committed to hitting the 2% inflation target.
As for the quantitative tightening (QT), the BoC said it would start on April 25, stopping the reinvestment phase. The BoC added that “Government of Canada bonds maturing on the Bank’s balance sheet will no longer be replaced and, as a result, the size of the balance sheet will decrease over time.”
Regarding Ukraine, the BoC said that high oil, natural gas and commodity prices are adding to global inflation. Supply chain constraints, a consequence of the war, weigh on activity and would be the main drivers of a “substantial upward revision of the Bank’s inflation outlook in Canada”.
The BoC added that Canada’s economy is strong and moving towards excess demand. The bank stressed that labor markets are tight and companies report they are struggling to meet demand, passing higher input costs on to clients. Furthermore, the central bank added that growth appears to have been stronger in the first quarter than projected in January and is likely to pick up in the second quarter.
Therefore, the interest rate differential so far benefits the Canadian dollar. However, in the medium to long term, the Fed’s hawkish line expectations could favor the dollar as money market futures expectations show a 94% chance that the Fed will raise rates to the 1% threshold. , the same level reached by the BoC in April.
Later at 15:00 GMT, the Bank of Canada would hold its press conference, led by Governor Tiff Macklem and Carolyn Rogers, Senior Deputy Governor.
USD/CAD Price Forecast: Technical Outlook
USD/CAD 1-hour chart is skewed to the upside, and on the BoC rate decision, USD/CAD reacted lower, breaking below the 50-hour Simple Moving Average (SMA) and pivot daily, each at 1.2634 and 1.2630. pushing the pair towards the 1.2620 area.
To the upside, the first resistance for USD/CAD would be the daily pivot of R1 at 1.2680. A break of the latter would expose the psychological mark at 1.2700, followed by the daily pivot R2 at 1.2710. On the other hand, the first support for the USD/CAD would be the 50-hour SMA and the daily pivot in the 1.2634-1.2630 area. A decisive break would expose the 100 hourly SMA at 1.2611, followed by the daily S1 pivot right at the 1.2600 mark.
Technical levels
Source: Fx Street
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