Canada: A 25bp rate hike is highly expected. BoC terminal rate is expected to hit 4.5%

Canada: A 25bp rate hike is highly expected. BoC terminal rate is expected to hit 4.5%

The Canadian dollar is slightly lower on Tuesday. In the European session, USD/CAD is trading at 1.3620, up 0.24%.

What does the Bank of Canada have planned?

The Bank of Canada has been aggressive in its tightening, including a whopping full-point hike in July, which brought the cash rate to 2.50%. The BoC has been gradually easing since then, raising rates by 75 bp and then 50 bp, bringing the cash rate to 3.75%. Will the trend continue on Wednesday? According to the markets, probably yes. There is a 72% chance of a 25 bp move, with a 28% likelihood of a second straight 50 bp move.

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At the October meeting, there was a 50/50 split over whether the BoC would raise rates by 50 or 75 bp, and the Bank opted for the more conservative move. With the Canadian economy showing signs of slowing down amidst an uncertain global outlook, a modest 25-bp hike would make sense. Still, it must be remembered that inflation remains very high at 6.9% and the BoC has shown that it is willing to keep the rate pedal on the floor if necessary. If the BoC goes for the 50 bp increase, it would be viewed as a hawkish surprise which would likely boost the Canadian dollar.

What can we expect from the BoC in 2023? The terminal rate is projected at around 4.5%, which would mean several more rate hikes early in the New Year. Of course, rate policy will be heavily dictated by key data such as employment, consumer spending and inflation. In addition, the BoC will want to keep pace (or close to it) with the Federal Reserve, which is widely expected to raise rates by 50 bp next week.

USD/CAD Technical

  • USD/CAD is testing resistance at 1.3619. Above, there is resistance at 1.3762
  • There is support at 1.3502 and 1.3359

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Canada: A 25bp rate hike is highly expected. BoC terminal rate is expected to hit 4.5%

Kenny Fisher

A highly experienced financial market analyst with a focus on fundamental analysis, Kenneth Fisher’s daily commentary covers a broad range of markets including forex, equities and commodities. His work has been published in several major online financial publications including, Seeking Alpha and FXStreet. Based in Israel, Kenny has been a MarketPulse contributor since 2012.