The Canadian dollar has extended its gains on Tuesday. USD/CAD is trading at 1.2545, down 0.26% on the day. The Canadian dollar received a boost as Ivey PMI for May climbed to 72.0, up sharply from 64.3 in April. The PMI hit a record high of 74.2 in March.

BoC hiking rates, cutting assets

The Bank of Canada is matching the Federal Reserve’s aggressive tightening cycle, after back-to-back 50bp rate hikes for the first time since 2000. Inflation accelerated to 6.8% in April and remains Public Enemy number one. Although we’re not yet seeing an ‘inflation peak’, the results from the sharp rise in interest rates can be seen in the housing market, as home sales fell 12.6% MoM in April. As is the case with other major central banks, the BoC is concerned about inflation expectations becoming unanchored, which makes it critical that the BoC maintains credibility that it will bring inflation down.

Aside from hiking interest rates, the BoC commenced quantitative tightening (QT) in April, whereby government bonds are no longer being replaced once they mature. The BoC is committed to QT becoming an important plank in its tightening programme, with a plan to slice its Canadian government bonds total from about CAD 440 billion to CAD 280 billion by the end of 2023.

The BoC’s hawkish monetary policy is helping the Canadian dollar keep pace with its US cousin, at a time when the Fed is also tightening aggressively and US Treasury yields are moving higher. Yields on 5, 10 and 30-years are currently above the 3 per cent level. The BoC will need to continue to keep pace with the Fed; otherwise, the US/Canada rate differential will widen and send the Canadian dollar lower.

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USD/CAD Technical

• There is support at 1.2608 and 1.2548
• USD/CAD is testing resistance at 1.2664. Above, there is resistance at 1.2775

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