USD/CAD darts lower after hawkish Bank of Canada decision

The USD/CAD pair retreated on Wednesday after the relatively hawkish Bank of Canada (BOC) interest rate decision. The pair dropped to 1.2426 and then pared back some of the losses.

Bank of Canada decision

The BOC concluded its two-day meeting and decided to leave the overnight rate at 0.25% where it has been in the past few months. The bank also decided to cut the size of its weekly asset purchases by a third to C$2 billion ($2 billion). 

This was the third time that the central bank has tapered its asset purchases since last year. The previous taper happened during the April meeting. This means that the BOC will be the second major central bank to exit from its asset purchases program. The Reserve Bank of New Zealand (RBNZ) said that it will end its purchases later this month in an earlier meeting.

Most analysts expect the central bank to end the QE program in the fourth quarter of this year and then embark on a plan to hike interest rates. This will mean that Canada will have the highest interest rates in the developed countries. In a statement, the bank said:

“We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s July projection, this happens sometime in the second half of 2022.”

The BOC was buoyed by the overall strength of the Canadian economy. Data published on Friday showed that the country added more than 230k jobs in June. This brought the overall employment within 1.8% of pre-pandemic levels. Other numbers like inflation and manufacturing production have been relatively positive. Further, crude oil prices have jumped to the highest level in three years.

The USD/CAD is also reacting to the overall strong inflation data from the US. Data published on Wednesday showed that the overall headline producer price index rose by 7.3% in June after rising by 6.6% in May. The core PPI rose by 5.6% as supply challenges continued and commodity prices rose. Data released yesterday showed that the headline CPI rose by 5.2% in June.

USD/CAD technical analysis

The USD/CAD pair declined after the latest BOC interest rate decision. The pair fell to 1.2426, which was substantially lower than this month’s high of 1.2540. On the 4H chart, the pair is slightly above the 25-day and 50-day moving averages. It is also close to the lower line of the ascending channel shown in blue. Therefore, the pair will likely rebound as investors price in a hawkish Fed after the strong US inflation data.