USD/CAD to 1.20 after surprise Bank of Canada (BoC) rate hike

With the huge move in USD/CAD yesterday, could this be the fastest period in the hike cycle? What are the signals that the BoC will tone down rate hikes?

USD/CAD to 1.20 after surprise Bank of Canada (BoC) rate hike

Yesterday the Bank of Canada (BoC) surprised the market with a 25-basis rate hike. This drove the USD/CAD pair to a low of 1.2135 yesterday from a daily high of 1.2415. Quite a significant move given the expectation that the BoC were going to hike again this year, albeit not this early.

It was expected that the BoC would hike again this year. But after doing it earlier than anticipated, they have reigned in their forward guidance, saying that they do not have a pre-set hike course. 

A major factor in the BoC's decision to hike was the better than expected GDP numbers, which saw the Canadian economy expand 1.1% QoQ in the three months to June 2017. This followed a 0.9% growth in the previous period, which is the highest growth rate since the third quarter in 2011 {PIC}.

source: tradingeconomics.comtradingeconomics.com

This growth has been mainly boosted by household consumption and exports of good. 

What next for USD/CAD?

The BoC have now given the markets a few shocks since their decision to implement a hiking cycle. They have toned down their forward guidance, which could suggest the cycle beginning to slow. However, by the way the market has reacted, it is expecting more rate increases - potentially this year.

Sentiment is still bullish on the Canadian dollar but I do think that we are in the fastest part of the cycle (which may not have ended yet) and may creep up on us sooner than expected.

The first tell-tale signs will be data relating to household consumption and exports of goods. If we see those figures begin to settle down, then that would suggest the hikes are doing their job and no more are needed.

Technical view-point

Given the extremely volatile day we witnessed yesterday in USD/CAD and with the market currently trading just below 1.22, I think there is a high chance we will see this market trade down to the 1.20 handle. 

Given the break of S2 (1.2231) and the MACD providing a sell signal, the next logical support is the psychological number of 1.20, which has held in the past and has S3 (1.2020) sitting just above it.

USD/CAD Daily Chart

 

0 Brokers added for comparison:
Clear all