The Canadian dollar traded sideways overnight after a choppy session on Wednesday. Nevertheless, the currency stayed well within the USD/CAD range of $1.2290-$1.2440 that has contained price action since October 14.
The Bank of Canada surprised markets when its bias flipped to hawkish from dovish. It appears that the Governing Council has determined that high inflation may be far less transitory than expected, which means a benign interest policy is no longer applicable.
The BoC announced it was ending its quantitative easing program. They will still be buying bonds but just enough to replace maturing bonds. The news was expected, but it is also the first sign that the era of ultra-easy monetary policy in Canada is ending.
The BoC raised its Q4 inflation forecast to 4.4% from 3.4% previously but still have hope that inflation will drop to 2.1% by the end of 2022.
Governor Tiff Macklem said in his press conference opening statement, "I want to assure you that inflation is not going to stay as high as it is today, even if it is going to take somewhat longer to come down. The Bank of Canada is committed to ensuring that price increases don’t become ongoing inflation."
The BoC surprised markets when it brought forward the timing of the next interest rate hike to sometime between April and September 2022. The monetary policy statement said, "We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s projection, this happens sometime in the middle quarters of 2022."
Canadian dollar support from expectations of BoC rate hikes will be eroded rapidly if next week’s FOMC meeting suggests the Fed is on track to raise rates earlier than expected. Today’s U.S. Gross Domestic Product and weekly jobless claims may raise the odds for a hawkish Federal Open Market Committee outcome.
The European Central Bank monetary left interest rates unchanged. EUR/USD barely reacted as traders are awaiting President Christine Lagarde’s press conference.
GBP/USD traded in a $1.3724-$1.3773 range with downward pressure due to elevated tensions between the U.K. and France due to fishing rights.
AUD/USD churned after the Reserve Bank of Australia seemed to signal that domestic interest ratees may rise sooner than expected. The RBA failed to purchase April 2024 bonds at its yield target of 0.10% which led to a spike in yields to 0.50%
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
